A comparison of Global Rental Markets.
Over the past century, the consensus to become a homeowner in US has remained a key motivation.
The national US homeownership rate is 64.8%, according to the most recent data from the U.S Census Bureau. There is still a huge appetite for Americans to buy their own homes, however the Multifamily rental market has been maturing for 25 years. During this period, there has been a cultural change – Americans now see renting as a viable lifestyle choice. In this growing market, investors and developers are increasingly looking a new and innovative high-tech solution to attract and retain customers. With so much maturity, expertise and innovation, why is the US consumer market actively choosing to rent rather than buy?
Key attractions for tenants include desirable locations, amenities such as gyms, pools and roof terraces, flexibility and reliable maintenance and management of the building. It is important to recognise however that in that multifamily living is not one single model. The focus is predominantly on building high-rise, luxury buildings with a range of amenities, however 70% of the existing multifamily is built low-rise, in suburban areas and aimed at families. Many developments may include gyms, communal areas, cinemas, roof terraces and restaurants, but 49% of US renters are over 35 and 46% adults with children.
The market has evolved as the demographic has too. An average renter will spend at least a decade living in a Multifamily, therefore it is critical developers must future proof and design their buildings for the long term – this means communal spaces, the ability to make changes and continue to build a true sense of community. For example, in Seattle, luxury high-rises have added numerous new amenities including a bowling alley and arcade, to a communal treehouse. Contemporary New York apartments are offering dog yoga and guitar lessons. In Detroit, planned developments feature smart lockers, pre-installed smart home assistants, sky terraces with fire pits, and on-site vehicles for rent. And in San Diego, the forthcoming developments feature infinity hallways, a vaulted mailroom lined with gold, an outdoor chef’s pavilion, and an open-air garden in the round – the ideas are endless.
Are these amenities a bit extreme? Perhaps. But it reflects how developers (and tenants) think multifamily living should evolve. According to “Disruption,” a report by the National Multifamily Housing Council (NMHC), the nation will need to add 4.6 million new units by 2030 just to keep up with the demand for apartment living. The multifamily boom has forced the sector to be more flexible as it tries to design units that are more tailored and adaptable to tenants’ lifestyles and needs.
Will this shift continue among the next generation of millennials? deverellsmith explores this phenomenon, focusing on an exploration of rentals markets globally, the reasons for their existence and why they are following in the same path as the states.
UK Build to Rent
According to the English Housing Survey in 2003, the proportion of UK households owning their own home reached a peak of almost 71%. However, the figures today are slowly diminishing, particularly among millennials. The current generation aren’t buying homes at the rate of previous due to ongoing issues such as affordability, student debt and less loan availability. Urban Institute reports that 37% of millennials owned homes in 2015 – a full eight percentage points lower than Generation X and baby boomers at the same age.
Undoubtedly, the number of UK residents renting privately is on the rise. Research from PwC has revealed that London will become a city of renters by 2025, with only 40% owning their own home. Into this growing gap between social housing and home ownership the build-to-rent model has given property developers a new way to profit from Generation Rent. Research published by the British Property Federation showed that there are now 148,046 build-to-rent homes complete, under construction or in planning across the UK, a jump of some 20% against the same period last year.
Like the US, BTR schemes are designed and built with the consumer in mind and seek to maximize the customer experience. They are focused around large scale development and institutional owners, thus moving away from the traditional private rental sector (PRS) market. Developers are creating products tailored around their lifestyle, focusing heavily on brand and the amenities they provide. Not close to the sophistication of the Multifamily market, but certainly heading in the same direction.
According to recent data at the German Federal Statistical Office, the countries homeownership rate is 51.2% (among one of the lowest in the developed nations and in Europe). Unemployment however is only 3.1%, so why has renting become such a prominent option? Some very unpleasant business in the late 1930’s and 1940’s has been the root cause of this.
Following Germany’s surrender in May 1945, 2.25 million homes destroyed with an additional 2 million damaged, reducing the housing stock by 20%. Change was needed and a 1946 census outlined 5.5 million homes were need in what would eventually become West Germany. Other widespread issues, such as employment and political issues, Germany formulated a new housing policy to benefit a large proportion of the population as possible. Once this policy was finally pushed through, it was a success. By 1956, the housing shortage was halved, and by 1962 down to 650,000. Most of this housing were rental units. Why? Due to small demand from potential buyers. The mortgage markets were weak the banks required borrowers to put down large payments. Very few Germans had enough money.
It is important to note that Britain also had similar issues during this period, yet the nation didn’t remain renters. The UKs homeownership rate is 66% (according the Trading Economics), far higher than Germany’s. However, when the UK government gave housing grants to encourage the building of new homes after the war, only public sector and local government entities were eligible. This essentially pushed the private sector away from the rental market. In addition, the UK implanted strict rent caps on developers, in turn the quality of housing suffered.
Germany’s rental policy is still strongly regulated (like most markets), however these regulations have been particularly favourable. For example, the law allows governments to cap rent increases at no more than 15% over a 3-year period. In addition, there are numerous other laws and regulations which have meant that rents – compared to those of other developed nations – are cheap and affordable.
Like the US, the UK and Germany are both extremely buoyant markets, but for very different reasons. Influenced by either political, economic or social factors, the housing market is constantly changing. Real estate investors need assurance that their next investment, whether its their first or next, is future proofed to endure market changes, which cannot always be expected.
Will the US truly see a reversal in the shift towards renting over buying? Perhaps, but either way the USA should continue embrace and adapt to any lifestyle changes. We must continue to evolve and find new and innovative ways to build and create rental experiences for the longer term.
Nick leads our build-to-rent division at deverellsmith, advising a wide range of clients on hires across investment, development and operational management. His team has advised on some of the most exciting and innovative build-to-rent developments in the UK and European markets.
He graduated from The University of Manchester with First Class Honours in B.A. Management in 2016, and has worked in real estate search and advisory for four years. Clients working with Nick will benefit from unrivalled knowledge of the sector, high quality service and a long-term partnership offering within your business.
Contact Nick directly at email@example.com or on 020 7291 0917.