A key idea we want to expound in this article is that the blurring of these two concepts has led to a widespread misunderstanding of real estate as an asset class. Part of our mission here at Shojin is to set this misunderstanding straight, and in doing so to unlock lucrative investment opportunities in the real estate space.
An Englishman’s home is his castle
A solid truism of financial advice has always been that you should start the process of obtaining a mortgage and paying down this debt, with the final goal of achieving full and debt-free ownership of your house, as soon as possible.
On an individual level, this may be a good approach, and no doubt for a certain portion of the population, this is the best use of their available income.
However, this approach fitted significantly better with the more static and predictable lifestyles of previous generations. Today, the kind of linear life path envisioned by this approach to home-ownership may or may not fit with the realities of the 2020s.
A whole host of what business analysts’ term social ‘mega trends’ mean that the relationship between people and their homes is changing.
Social mega trends impacting the housing market
Previous generations of professionals might well have aspired to and expected to achieve ownership of a ‘home for life’. This would be somewhere saved for in their 20s, purchased via a mortgage in their 30s, raised kids in and climbed the career ladder based at through their 40s and 50s, and then retired to in their 60s.
Our market research has revealed that although this model may still be appropriate for some today, they are becoming an increasing minority.
This change has been driven by a series of evolutions, including the changing nature of work; changes in the age we tend to start families; the increasing difficulties faced by first-time buyers; and the desire to consume more of our income.
Changing nature of work
Arguably the most important of these factors are shifts in the way we work today.
The dynamism of the 21st century tech-powered economy means that people’s career paths are now much more diverse and non-linear than previously.
The young and educated have vastly more opportunities and possibilities today than they had even just a few decades ago, and this has created a generation of professionals who are much more geographically mobile than their predecessors were.
The blurring of boundaries between professional services jobs and the rise of new hybrid forms of WFH has also meant professionals today probably have much more autonomy over their career paths, too.
These changes have meant the traditional home ownership model outlined above is far from how many or even most people experience the property market today. This is the case because people who would have been settling down and trying to buy houses are more likely to be moving between cities, both nationally and globally, and changing job roles in their 20s and 30s today.
Horses for courses
This has generated a situation where people are starting to think about housing differently.
Gone is the idea of a single purchase financed through a debt burden you will carry around for most of your lifetime, and instead a focus on housing being above all else flexible and able to meet our needs at different times of life, and in the different ways that are appropriate as our lives develop.
For this flexibility to be possible, home ownership in the traditional sense is often impossible, and in fact undesirable, to the extent that mortgage-financed ownership would enormously reduce the scope for career and life mobility.
A suitable analogy would be the rise of financing as an approach to personal transportation.
Proponents of leasing argue it gives superior choice and flexibility, whilst saving the customer from the significant capital outlay that would have been needed to actually buy the car outright. If and when the customers’ needs change – for example, they start a family and now need a people-carrier rather than a two-seater – they can change their car quickly and simply.
Given that new cars are an asset famed for their ability to depreciate rapidly and immediately, the leasing model seems to make a lot of sense.
Leasing your car has become a generic and commonplace method of acquiring a car, and analysis suggests a similar move is underway in the housing market.
The rise of Build-to-Rent
This social mega trend has aligned with the need for institutional money to find solid, income-yielding assets to give birth to a whole new sector of the housing market, so-called Built-to-Rent (BtR).
BtR is exactly what the name suggests; new housing developments built and sold to institutional investors with the express aim of renting out the units. The lack of new housing stock built at all, and the fact that what is built tends to be too pricey for most first-time buyers, has propelled the BtR sector to tremendous growth over the last few years.
Research from Savills shows the scale and pace of growth in this new model of how homes fit into our lives today.
They estimate that the UK Build-to-Rent market now stands at approximately 71,000 completed homes, with a further 42,000 currently under construction. In addition to this, projects due to commence this year add another 99,000 homes to the total, leaving little room for doubt as to the significance of this trend.
An obvious example of where BtR is having an immediate positive impact is the student accommodation sub-sector. The BtR model fits perfectly with the relatively short-term housing needs of the UK’s student population, where around 2.6 million Higher Education students a year need affordable but good quality rented accommodation in or near city centres.
By financing these sorts of developments, Shojin can provide market-beating returns to our investors whilst also helping to alleviate the shortage of good quality accommodation options available to this demographic.