Investors in US listed apartment funds look set to benefit from the country’s ‘millennial’ makeover and declining home ownership, according to new AMP Capital research.
The ‘Generation rent’ white paper says the structural shifts implied by the maturing city-dwelling ‘millennials’ – or those born between 1980-2004 – and a sustained post-GFC slump in home-ownership support higher returns for US-based apartment real estate investment trusts (REITs).
Home ownership in the US has slumped from almost 70 per cent just prior to the GFC to its current level of about 63 per cent, the AMP Capital study shows, equating to a rate “not seen since Lyndon B. Johnson occupied the White House 50 years ago”.
While the rapid fall in US home-owners was partially due to the mass mortgagee exits in the immediate few years following the 2007/8 GFC, the downward trend has continued despite an easing in loan defaults.
“Indeed, there has been no improvement in the homeownership rate even as the default rate has improved dramatically, from over 10 per cent in 2012 to around 4 per cent in 2016,” the study says.
Tougher credit conditions combined with heightened regulatory scrutiny of US banks had reduced the potential house-buying market, the paper says, but demography also plays a significant part in the trend as the millennial generation assumes greater economic power.
“By 2025, Millennials will represent 75 per cent of the American workforce…,” the AMP Capital report says. “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.”
And millennials, as a rule, prefer renting in hip urban areas than mortgaging into a suburban dwelling
However, further research shows that millennials still aspire to owning property, albeit later in life than their recent forebears.
“And yet, if it is imprudent to assume Millennials will be perpetual renters, it is equally remiss to assume that the Generation Rent phenomenon will only be a flash in the pan,” the AMP report says.
The entrenched rental shift has tipped the balance further away from home ownership in US metropolitan centres, the study says: nine of the 11 biggest US cities recorded more renters than home-owners in 2014 compared to “just six of these same cities in 2006”.
“The average increased by roughly 5 percentage points, and all 11 saw the number of renters increase,” the report says. “Even less expensive, homeowner-dominated cities like Philadelphia and Atlanta saw an increase in the number of renters versus owners.”
Surging rental demand for apartments combined with supply constraints gives real estate owners a pricing power that flows through to the REIT market, AMP Capital says.
The US$100 billion plus US apartment REIT market represents about 8 per cent of the global listed real estate index, the research says, making it “the third-largest US sector behind mall and office owners”.
Furthermore, apartment REITs tend to be “high quality” with a rash of consolidation in the sector “leaving an investible set of large, well-capitalised companies with seasoned management teams”.
“This is certainly not to say that the US apartment REITs will always outperform,” the report says. “Indeed, there will be times when better opportunities present themselves, particularly if investing in the listed real estate sector with a global remit. However, we believe that this subsector is a more attractive through-cycle investment because of… structural tailwinds.”
The ‘Generation rent’ paper is a sequel of sorts to the AMP Capital ‘Intergenerational theft’ report published this February, which argues global demographic trends point to worldwide pension-funding problems and fierce competition between countries and cities for younger, tax-paying, talent.
Secondly, the February study says “the changing structure of the workforce, combined with the changes in supply and demand of savings by different age cohorts, is potentially painting a future picture of low yields, low growth and higher inflation well into the 2050s”.
Against that backdrop both global listed property and infrastructure assets would be valuable portfolio exposures, the AMP Capital paper says.
“If you’re looking for inflation protection, attractive yields, strong cashflow generation and tangible assets in winning locations, Global Listed Real Assets is a fertile hunting ground.”