BNP Paribas Real Estate recorded GBP13.3 billion (US$17.21 billion) of UK acquisitions in the living and hotel sectors in the 12 months till the end of June, a record breaking one third of all acquisition activity as well as a near 150% year-on-year increase in cross-border activity in the first half of the year.
So, what’s encouraging this relative frenzy of activity? In short, the demand versus supply dynamics across the many of the subsectors and the rental growth that this is generating.
In my view, the private rental sector including single-family rentals suffer from having awkward naming classifications that do not encapsulate what they actually are. However, what unites them is inflation beating rental growth. With inflation now bumping along at or close to the Bank of England’s target of 2% , BNP Paribas Real Estate recorded annual rental growth till the end of June at 8.6%, while Zoopla reports that there are an average of 15 enquiries for every rental home that becomes available.
We have long been fans of the student accommodation sector, with its annual rental growth only narrowly behind the private rental sector at 7% according to BNP Paribas Real Estate. This is despite the efforts of the previous government to discourage international students. A continued favourite of Islamic investors, Bank of London & The Middle East, recently conducted a survey where 68% of respondents said their clients were focused on the sector.
Even the home care sector, hit hard by COVID, is showing signs of reaching a balance again, with Carterwood reporting 89% occupancy across the sector. This also demonstrates the positive future demographics of a rapidly growing number of those over 85 years of age due over the next decade or so. While the new Labour government is promising a loosening up of the planning system with ambitious housing targets, several commentators have pointed out that planning is not the only constraint, and that the number of houses being sought would rapidly increase building costs, having only recently shown signs of coming down. In short, combined with high borrowing costs and land values, the low supply relative to demand is not going to disappear anytime soon.
Combined with attractive purchase yields, particularly when compared to where they got to before the music stopped in summer 2022, I would be amazed if we don’t see more Islamic equity seeking the investment comfort that the UK bed sector has to offer.
Written by Philip Churchill, first published in Islamic Finance news Volume 21, Issue 34 dated 21st August 2024.