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Investing in living 

by Shoosmiths LLP

Published: October, 2021

Submission: October, 2021

 



Our homes have evolved in the last 18 months. They have become a bit more “mixed use” - school, office, gym, doctors’ surgery and even kitchen disco.


The enforced focus on the use of our homes during the pandemic - particularly their inadequacies, together with the flexibility that working from anywhere has brought - has created unprecedented demand to move house and / or relocate. There was also the small matter of a £530m Government SDLT giveaway that may have had some effect.


In times of uncertainty, our homes become places of sanctuary and security. This is true for both individual homeowners and institutional investors who have flocked to bricks and mortar. After an incredible year off the back of the pandemic, the intense focus on the sector continues, creating any number of interesting trends, challenges and opportunities. Examples include private equity investors hovering to take advantage of the low share prices of listed housebuilders; diversification between living sector assets; Lloyds and John Lewis the surprise new entrants to the investor landlord cohort; and ‘build to rent’ (BTR) coming of age.


Amidst the clamour to invest in living products and assets, there are challenges too, both immediate and medium term. Land prices are increasing along with build costs. With margins doubly squeezed, can developers ensure that supply keeps up with demand? Housebuilders are struggling with supply chain issues, anecdotally swapping bricks for render and stockpiling timber and plaster. There are also labour constraints post-Brexit, and not to mention the impact of the “pingdemic” in the summer.


Ground rents are confined to history, taking with them a profitable income stream for developers and investors alike. Particularly surprising was the news that the outlawing of ground rents will also apply to retirement housing. The fall-out from the Grenfell tragedy continues to create unique obstacles for owners, developers and lenders in the sector, particularly high-rise BTR blocks and residential apartments. Gateway 1 has come into force, building regs are changing and the EWS1 form scandal remains unresolved.


Investors are searching for yield in the living sector, hunting out the best performing assets. The leasing market - relevant to the ‘build to rent’, student and later living subsectors - will have issues to contend with too, including the fact that the abolition of RPI in 2030 will require a replacement index. There is talk of an inevitable return to inflation, which will worry individual homeowners but conversely boost commercial investment returns in the longer term.


2021 heralded a collective light bulb moment regarding climate change (and rightly so) and investor and funder anxiety regarding ESG compliance is palpable. Much of the product available to be funded now will have been based on a scheme developed two or three years ago, prior to the sea change in corporate attitudes to the climate crisis. All of our living specialists are advising clients on the impact of ESG requirements on their schemes.


In our latest report, we probe the highs, lows and future trends of the living sector in more depth. Enjoy.


To access the report, please click on the link to the right of this page.


 



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