Reimagining the future of residential real estate

Reimagining the future of residential real estate

The unprecedented Covid-19 crisis has provided new glimpses of how the future of residential demand-supply could evolve in the new world.

Fri, Jun 19, 2020

LOUIS CHUA


AS CORPORATES re-evaluate their real estate strategies post-Covid, much has been said about the impact of work-from-home practices on the office sub-sector, and e-commerce on the retail sector.

However, residential real estate has often been viewed as structurally undisrupted, particularly in Asean countries, given attractive demographics and urbanisation trends. After all, how do you replace living space?

The unprecedented Covid-19 crisis has nonetheless made us rethink how the future of residential demand-supply could evolve in the new world.

Adoption of PropTech

With show galleries closed due to social distancing efforts, developers and real estate agencies have stepped up digital marketing efforts to increase interaction with prospective buyers via non-traditional channels. Examples include the use of virtual tours, which are still facilitated by real-estate agencies.

In Vietnam, a leading developer launched its e-commerce platform in April, with potential homebuyers now able to view complete project information and make online purchases securely, without the need for direct physical interaction with sales staff.

In the near term, we believe real estate agencies will continue to be relevant in facilitating residential sales, particularly in smaller or niche markets. In the longer term, however, we believe the wider adoption of technological platforms could reinvigorate the threat of disintermediation, with a diminished role for real estate agencies as the middleman.

Decentralisation and urban dispersal

Urbanisation has become a global mega-trend, with the United Nations estimating that the world's urban population had risen sixfold - from just 751 million in 1950 to 4.2 billion in 2018.

Due to the efficiencies from concentrating economic activities, physical assets and infrastructure, urbanisation has been long associated with rising incomes and job opportunities.

Amid social distancing efforts, however, we think Covid-19 could start to raise concerns about the negative effects of high population densities in cities.

The rising prevalence of flexible working arrangements could also inherently change the demand and attractiveness of homes surrounding work areas and city centres, particularly if congestion, environmental concerns and housing affordability are taken into consideration.

There is thus scope for the large gap between average home prices in the city centres versus outside of the city centres to close, particularly as governments and urban planners shift their focus towards sustainable urban development.

Rethinking home ownership

With a large degree of uncertainty around the timing and speed of economic recovery post-Covid, we believe access to liquidity and cash flows to be critical to households and corporations alike. Yet home ownership would likely necessitate a large proportion of households' assets being tied to their primary residence, with mortgages a corresponding source of liability.

With home ownership as a key source of financial stress for households during this downturn, we think the seemingly incontrovertible superiority of home ownership as a model could be tested.

Across Asean countries, we note that home ownership rates have been consistently high, led by Vietnam and Singapore at 91 per cent and 90 per cent respectively. This is significantly above that of the Organisation for Economic Co-operation and Development (OECD) average of 68 per cent.

Importantly, within OECD countries, Switzerland and Germany have the lowest home ownership rates of 38 per cent and 44 per cent respectively, while at the same time having one of the highest gross domestic product (GDP) per capita and Human Development Index (HDI) scores globally.

Rather than a natural outcome of economic progress, we believe that cultural factors and government policy played a larger role in influencing home ownership rates in the region.

In conjunction with the broader trend of rising residential property prices, we estimate that housing affordability has worsened over the last decade across key Asean markets. While rising home prices has led to wealth accumulation for earlier generations of home owners, we believe affordability could increasingly be an issue for the younger working population.

With home ownership and residential property remaining the primary channels for the distribution of wealth, a continued rise in home prices, if not adequately addressed, could result in widening economic inequalities over time.

Interestingly, the returns from home ownership have often been described as attractive. On the contrary, renting is commonly seen as "throwing money down the drain". We argue, however, that home ownership may not be an economically superior option compared to renting, with the equivalence of the two depending on the underlying assumptions used.

Following the immediate market disruption brought about by Covid-19, we believe that significant structural changes to the economy are likely, and these warrant greater economic dynamism and entrepreneurship.

As high home-ownership rates may impede the mobility of workers, we believe that greater labour market mobility should be encouraged to support demands for a more dynamic economy.

Ensuring adequate provision of affordable housing remains important for governments; but rather through direct and indirect subsidies for home ownership, we believe housing needs and the demands placed on the future economies would be better served via a lower reliance on ownership, but with a decreased supply of housing units with improved tenancy and renter protection.

Greater securitisation of residential property

In line with our expectation of a larger role for residential rentals versus individual property ownership, we see significant scope for residential property to expand in the investable real estate universe.

In our view, the key to addressing the dichotomy between ensuring housing affordability and growing household net worth is to separate the investment and housing roles that one's primary residence plays today. With a sizeable and growing housing stock, we believe there is significant potential for Asean markets to securitise residential property ownership - such as via a real estate investment trust (Reit) structure.

In this regard, we see potential for Singapore to take a market leadership role, as Singapore currently has the largest Reit market in Asia ex-Japan, with 44 Reits and property trusts and a total market cap of around S$94 billion. Unlike the US Reit market, however, where residential Reits represent the second-largest sector by market capitalisation, there are currently no residential Reits in Singapore or the Asean region, given the nature of the market today.

If residential Reits are successful in the long term, households would be able to benefit from higher financial liquidity, professional portfolio management, improved risk-pooling and diversification - while retaining the same underlying exposure to residential property, should they wish so.

The writer is research analyst at Credit Suisse

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