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Thursday, February 20, 2020

To Buy or Rent? That is the question for the UK retirement housing market today

Avison Young Health team to discuss commercial real estate services for retirement housing in the United Kingdom

A shake up within the retirement housing market has begun. According to articles in both The Guardian and The Times towards the end of 2019, ‘plummeting values’ of re-sale retirement properties mean that property could be worth 90% less when being sold by the owner’s successors.

Now, more than ever, the spotlight is being turned on the rental model for retirement housing. Groups like Birchgrove are developing market rent-only tenures in their new retirement housing with care schemes, including their Queensgate scheme in Sidcup, a transaction for which Avison Young acted on behalf of the vendor.

According to the Laingbuisson Housing with Care UK Market Report 2019, the average age entrant to UK retirement housing facilities with care packages is 75 and the length of stay varies between 2.9 and 6.5 years. The Silent Generation, individuals born between 1928 and 1945, has always been known to buy, but is there enough security and benefit for them to opt for a rental property?

One of the many positives in the rental model is the obvious release of equity benefitting successors: no inheritance tax, no stamp duty to pay, no waiting for the family home to sell. Or, for those who don’t have successors, not seeing their cash go to the crown. There is also the benefit to those who want to move to more affluent locations but can’t pay the astronomical property prices; they can instead utilise equity to pay their rent for their remaining years.

For those who do opt for rental, the next consideration lies in their ability to cover their rent for their lifetime. The current providers of market rent housing with care require new residents to be able to prove they are able to provide a minimum of five years rent to secure a property. However, in order to offer the elderly the comfort and security they require, providers have had to factor in that they may need to financially support an elderly resident, allowing them to remain in situ should that resident no longer be able to pay their rent.

This poses a risk, of course, but on the flip side, risk also lies with a large scheme of empty, un-saleable elderly residential units. Innovative newer retirement properties with care schemes appear to be offering mixed tenures, setting aside a certain number of properties for leasehold purchase, shared ownership, and rent.

The rental only model is an emerging market in the private sector and therefore it is too early for us to be able to objectively point to its success. We, and I’m sure the rest of the market, will be keenly watching its progress. We are all aware that there is a growing need for extra care housing within the UK, with an ever growing elderly population. As Laingbuisson’s Housing with Care UK Market Report 2019 outlines, the potential market for housing with care is three million people, but only 2.3% of the addressable market currently live in housing with care sites. It is estimated that by 2030, between 100,000 and 250,000 people will live in housing with care sites.

The Avison Young Health team are excited about the disruption of the rental model to the care sector, as well as the opportunity to further work with those in this area of the market.

Charlotte Brierley, Associate Director, Health, at Avison Young (London, UK)

Thursday, January 23, 2020

2020 Outlook for the Houston Market

By Rand Stephens (Houston)

Commercial real estate in Houston, with the exception of the office market, was solid in 2019, and 2020 will be more of the same barring any major surprises. The economy over the last couple of years has been generally healthy with solid job growth and low unemployment. Withstanding a struggling upstream energy business, the overall Houston economy will continue to be positive in 2020.

Office Market Stalemate
The resiliency of the Houston economy amid a stagnant energy sector will likely stay on a positive track in 2020. However, annual job growth will decline to around 50,000 jobs from the approximate 80,000 jobs that were created in 2019. Job growth is the leading indicator for commercial real estate; however, don’t expect the office market to show major strides in 2020. It will be a flat, tenant-driven market that is still reeling from the downturn in upstream energy. Capital markets for upstream energy companies are basically shutdown, leaving merely companies’ available cashflow for restructuring. As a result, the office market is in for a slow, protracted recovery, without much of an improvement for 2020.

That said, there are factors that actually bode well for new construction. On the surface, with the high vacancy rate, it’s not clear why there would be any new construction at all. However, large companies are looking for more efficient floorplans as well as buildings that offer a cool, experiential workplace to attract and retain the best and brightest employees. It’s difficult for Houston’s 1980’s vintage inventory of class A buildings to compete with the new class AA buildings like Skanska’s Bank of America Tower or Hines’ new Texas Tower in Downtown Houston. Expect property management platforms to play a key role in achieving this experiential workplace environment in 2020. Relative to the size of the overall Houston office market, new development is certainly more of an aberration than the norm, but there is a strong likelihood that the Bayou City will see more new development in 2020, albeit, on a very limited basis.

Industrial Heavyweight
The industrial sector had a robust 2019, but there are some cautionary signs of over development as we enter 2020. With approximately 20 (msf) million square feet under development, supply is significantly outpacing demand. So, we expect that new construction will slow down this year to let demand catch up with supply. This “overbuilt” scenario will level out due to the ongoing need for space by industrial companies and retailers that are expanding their e-commerce platforms. Houston’s positive growth in population and jobs will keep pushing the demand for distribution facilities throughout 2020, and with a slowdown in development, demand will catch up with supply. 

Houston – Investor Interest
The overbuilt multifamily and industrial markets combined with the decline in fundamentals in the office and retail markets may reduce investor sentiment for Houston in 2020. Fortunately, capital investors recognize that these challenges do not outweigh the value of Houston’s inexpensive real estate as compared to other major U.S. markets. As a result , Avison Young’s research says that investment activity will stay strong in 2020.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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