Safe as houses: as years pass by, residential property remains the most resilient investment
When Her Majesty Queen Elizabeth II passed away last year, it brought the nation – and much of the world – together in mourning.
With 70 years on the throne, Queen Elizabeth II replaced Queen Victoria as the United Kingdom’s longest reigning monarch. There was much that united the two, from overseeing periods of dramatic social and economic change to having a London train line named after them.
Queen Victoria was fresh on the throne when Britain was gripped by ‘railway mania’. A mix of deregulation, falling interest rates and the success of the Manchester and Liverpool Railway – the world’s first ever inter-city rail link – encouraged Britain’s emerging middle class to pour their savings into buying shares of railway companies. This funded a boom in railway construction. But as with all booms, there was a bust, and many households were burnt by collapsing share prices.
Britain’s railway boom-and-bust is one of the supposed origins of the saying ‘safe as houses’. Compared to the then unproven technology of steam-powered locomotives, residential property was seen as a reliable investment. The scams involving cryptocurrencies and NFTs show there are learnings for today’s investors.
The attractiveness of residential real estate – and in particular rental housing – is down to its resilience as an asset class, which is underpinned by two factors.
The first is, unlike having somewhere to work or shop, having somewhere to live is a basic human need, regardless of the strength of the economy. In difficult financial circumstances, rent and mortgages are often the two last things people stop paying.
The second is that housing supply is not driven by demand but dictated by policy, with restrictive planning regimes limiting the delivery of new homes, especially where they are needed most: big cities.
That is why institutional investors such as pension funds and insurers, who have typically invested in commercial property such as offices, shopping centres and warehouses, are increasingly investing in rental housing.
In 2021, investment into multifamily – US property jargon for apartment blocks – overtook offices for the first time according to Savills. In the first half of last year, institutional investment into the UK build-to-rent market – homes built for rent rather than for sale – hit £1.7bn, according to research from Knight Frank.
However, with building costs spiralling thanks to supply chain pressures, interest is increasingly being directed towards acquiring existing homes, which make up 98 per cent of the rental market.
Rather than being a recent innovation, institutional ownership of rental housing is in some ways a return to the past. At the end of Queen Victoria’s reign, pension funds and insurers were some of the biggest landlords in the country.
Like sovereign bonds, rental housing offers institutional investors long-term liability-matching income streams. Crucially – and this is especially relevant given widespread warnings that the UK will face one of the worst recessions and weakest recoveries in the G7 this year – rental demand is counter-cyclical. Put simply, people are more likely to rent rather than buy during downturns – and this trend will stay true in 2023 too.
However, it is not just a recession investors have to contend with, but also rampant inflation. Real assets as a whole – including infrastructure like railways – are widely regarded as an effective hedge against inflation. However, out of them all, rental housing is arguably the most effective thanks to the ability to reset rents more regularly given the short length of residential tenancies versus commercial leases.
So after all if, and when, Britain gets to have a Queen again in the future, one thing is likely: the saying ‘safe as houses’ will still ring true.