As US home ownership declines, opportunity arises for investors: AMP Capital
The changing dynamic of home ownership in the US post-GFC, where Generation Y have transformed into Generation Rent, offers opportunities for Australian investors, says a study by AMP Capital.
The demographic shift leading to a steady decline in home ownership and its implications for real estate investors and the opportunities within the US apartment REIT sector has been dealt with in AMP Capital’s whitepaper, Generation Rent, authored by its Client Portfolio Manager for Global Listed Real Estate Chris Deves.
“The ever-changing consumption pattern of real estate, juxtaposed against its status as perpetual imperative for a functioning society, presents an interesting dynamic and is precisely that which offers a wide range of opportunities for long-term investors,” says Deves.
The rise of the millennial generation and its implications for the residential market in the United States is a case in point, he adds.
“The greater propensity for millennials to rent isn’t necessarily a surprise. After all, this is the same generation that pioneered the ‘sharing economy’, a collaborative approach to consumption, which draws heavily on the notion of renting,” said report author Chris Deves.
Millennials are opting for proximity to nightlife, restaurants and the workplace along with access to shared spaces and amenities, which is translating into greater demand for rented apartments in the urban core, he says.
“As a demographic cohort, the strong willingness of millennials to relocate in the pursuit of new career opportunities necessitates flexibility and mobility, which is also more conducive to renting over owning.”
The paper shows this is an important tailwind for US apartment REITs, which make up roughly 8 per cent of the global listed real estate benchmark or more than US$100 billion of equity market capitalisation.
The development in American dwelling habits is a positive for residential landlords, which in turn is investible via the listed institutional apartment operators.
US-based apartment REITs make up roughly 8 per cent of the global listed real estate benchmark, or more than US$100 billion of equity market capitalisation, the third-largest US sector behind mall and office owners. The apartment REITs are generally of high quality and have seen significant consolidation in recent times – five such REITs have been acquired or have merged during the past three years alone – leaving an investible set of large, well-capitalised companies with seasoned management teams, according to the AMP report.
“This has made apartment REITs attractive for real estate investors with a long-term investment horizon,” Deves said.
The assets held by these listed apartment REITs are predominantly located in the urban core where renting is most common. The change towards rentership (and, thus, migration into the city) is a positive for increasingly dense and difficult-to-build-in urban property markets. Additionally, an increasing focus on public transportation links should further benefit the high-quality apartment names.
Enter the Millennials
According to the white paper, the fall in the homeownership rate in the aftermath of the GFC was in part due to the rise in defaults on home loans. Though the default rate has recovered to 4 percent in 2016 from 11.3 per cent in early 2010, the declining trend of home ownership has sustained over the longer term.
Now, America is undergoing a major demographic shift. Millennials – or those born between 1980 and 2004, according to the US Census Bureau – are now the largest share of the American workforce, as depicted in Figure 4. By 2025, Millennials will represent 75 per cent of the American workforce [Source: US Bureau of Labor, 2016]. As the largest source of new demand for housing, be it home sales or rentals, this cohort wields significant influence over the residential real estate market.
The most important trend underlying the Millennial demographic is a greater propensity to rent, particularly in the urban core, at the expense of homeownership.
The movement of the prime renter demographic into the city centre will have an impact on apartment values. Cities have historically had a larger share of renters compared to suburban areas. So it is not surprising to see that the populations of US cities have become increasingly composed of renter households alongside the national increase in renters. Of the 11 largest US cities, nine had more renters than homeowners in 2014 versus just six of these same cities in 2006.
As a result of this migration away from the suburbs and towards the city, the apartment business has become a more attractive full-cycle investment. A bigger pool of renters means a more stable business at a given level of supply; additionally, an increasingly older tenant mix (Millennials rent later into life) should improve affordability ratios and allow for healthier rent increases.
Lastly, because of land and entitlement constraints in dense, urban areas – which will become increasingly more onerous over time – high quality, core product will become scarcer as demand from renter households continues to increase, and thus, should appreciate at a faster pace.
However, millennials won’t rent forever.
“The American dream of home ownership is not dead and buried. Gen Y are just as likely to head for the suburbs as previous generations, and starting a family is often an important catalyst. The key difference is that we are seeing this occur increasingly later in life,” said Deves.
“Cyclical affordability issues and demographic change has and will support demand for apartment rentals in city centres. During the property cycle, the US apartment REITs should therefore be in a stronger position to push rents, and quality management teams with insight into the needs of millennials will be best placed to deliver value for investors of all sizes.”
While the story is similar for Australian millennials, investing in the US could be an ideal way to play this trend for local investors as it offers the largest, highest quality, and most liquid set of listed apartment landlords, according to the report.
“Australian investors should consider a global strategy for listed real estate in order to access these kinds of thematics, which may not be as readily investible in their local market. A global approach also offers geographic diversification for the real estate portfolio,” concluded Dewes.
