Why should a real estate company invest in residential property?
By Franck Lirzin, Executive Director Residential
(article issued in Réflexions Immobilières n° 82 - Q4 2017)
While still just as strong, rental demand has changed. It is evolving towards more central and efficient housing, with a range of services, and maintaining mobility. At the forefront of these social and technological transformations, real estate companies must rise to the challenge.
Gecina is a listed real estate investment trust (SIIC) that owns, manages and develops property holdings worth 19.5 billion euros at end-August 2017, with nearly 92% located in the Paris Region. Its portfolio is made up primarily of office assets, which represent almost 15.5 billion euros. This is Europe’s largest office portfolio. Gecina intends to confirm its ambition for leadership on the Paris office market. Indeed, the Paris Region is still buoyant, as Europe’s number one market and one of the global leaders for commercial property. Its outlook is promising over the medium and long term, thanks in particular to the opportunities opening up with the Greater Paris project.
Heritage and profitability. Alongside this, Gecina still has a residential and student residence portfolio, valued at over 3 billion euros. These are residential buildings located primarily in Paris, as well as the city’s Inner Rim, in addition to student residences in Paris and other leading cities (Lyon, Bordeaux, Lille, Marseille). This is the largest private portfolio of residential assets in Paris. For a listed company like Gecina, which is looking to optimize its portfolio, why has it kept these residential assets? We believe this offers more potential for creating value than we would achieve by simply selling assets over time.
- First of all, its history. Gecina has been built up through mergers between a number of residential real estate companies that emerged with the Haussmann-era transformation of Paris or post-war reconstruction efforts. It is normal for Gecina to still have this heritage today.
- Another reason is profitability. Residential is still a safe investment, providing good profitability over the long term with a low risk. Over a historically long period, residential assets have shown better overall levels of profitability than any other asset class. When this diversification is managed effectively by an office specialist, it can be very complementary and virtuous over the medium and long term.
We are approaching a historic moment.
However, these two reasons - heritage and stable returns - are not enough on their own to justify keeping a residential portfolio. We need to look elsewhere to find the factors behind the renewed appetite for residential among investors.This upturn reflects a very positive environment. Economic, political and demographic indicators are green. We are moving into a rare moment, with a deep transformation, that can be compared to two prosperous periods in our history.
Haussmann Paris. The first defining moment was when Baron Haussmann accomplished his work. Rapid industrialization and a rural exodus were shaking up demographic balances – Paris’ population doubled in the first half of the 19th century – and leading to strong demand. Baron Haussmann, Prefect for the Seine, quickly deployed his demolition-reconstruction program across the whole of Paris. Blocks of flats for rent and town houses were the preferred models, promoting a mix of uses and social classes. To support the financial effort, Napoleon III created building societies (sociétés de crédit foncier), with Crédit Foncier de France to become one of the most well-known. La Fourmi Immobilière, Gecina’s ancestor, was founded during this period.
Post-war reconstruction. The second defining moment was the reconstruction of France after the Second World War. The resumption of the rural exodus, the urgent need to rehouse thousands of families and the baby boom phenomenon triggered a new demand-side shock, which the government responded to by quickly putting in place a housing policy (HBM low-cost housing reform, creation of social housing). The French state then looked for private funds to be part of the reconstruction effort: the new SII status for real estate investment companies investing exclusively in residential properties led to rapid growth in the number of operators. Around 20 companies were set up and would gradually merge to create Gecina.
22-24, rue Edgard-Faure, Paris XVth
Renting is becoming a symbol of freedom again.
Each time, the demand-side shock has restructured the real estate, political and financial landscape and led to a buoyant period for residential investment. Today, we are approaching a new defining moment. Why?
- The emergence of a knowledge-based economy has put cities back in the spotlight again. The proximity of talents, circulation of knowledge and interaction of ideas are combining to create a new world. Station F, which is home to thousands of entrepreneurs, is the temple for this new lifestyle. The time of endlessly expanding suburbs, desperate housewives’ dreams and highways cutting through urban environments is over. Today, we are seeing a condensation of spaces, mixed uses and personal mobility. Cities are no longer developing lengthways, but in terms of density.
- A mix of uses is becoming key and younger generations are re-appropriating city centers, with the boundaries between their private lives and professional lives diminishing. Real estate projects must take this new reality on board, and offer a mixed approach at the heart of the city. An office specialist must also have residential or retail expertise.
Usage economy. Metropolization is leading to a demand-side shock for housing in city centers, closer to shops and workplaces. Paris, which is one of the world’s top 10 most dynamic cities, alongside London and far ahead of Berlin or Rome, will be the laboratory for this societal transformation. Paris’ city hall has set itself a target to reduce the capital’s commuter travel by 30% by 2030. These same trends can be seen for other major French cities as well.
Housing is no longer synonymous with distant commuter towns, but proximity, mobility, porosity with urban life. Owning your own property used to be a sign of success. Today, it is a restriction, at best a burden. In the same way that consumers are increasingly unwilling to have to concern themselves with maintaining their cars, and prefer leasing solutions instead, future tenants will want “turnkey” housing. They no longer want the hassle of managing day-to-day issues. Renting is becoming an attractive option again today with the usage economy.
Rental property is evolving to become a service industry.
New services will be opened up by the diverse technologies rolled out for real estate. These smart cities and smart buildings have considerable potential for transformation, from combating global warming to giving tenants every possible comfort.
Thermal renovation. The real estate world supports the fight against global warming. Housing is one of the main sources of greenhouse gas emissions. Solutions are available to reduce our environmental impact and manage our consumption more effectively. Unfortunately, their use is still limited, due to the prices involved, despite the state support on offer. It is still expensive and complicated for individuals or owners’ associations to embark on major thermal renovation work with financial and energy benefits that are for the long-term future.
Real estate companies have a longer investment horizon, which enables them to take this first step. Gecina has put sustainable innovation at the heart of its strategy to create value, anticipate its customers’ expectations and invest while respecting the environment, thanks to the dedication and expertise of its staff.
Smart cities will also enable us to better understand and control our urban environment. This approach is becoming an increasingly integral part of buildings and housing, thanks in particular to connected devices. In the future, our homes will be fully connected, will be able to be controlled remotely, will be able to notify us of incidents and will even be able to arrange technical interventions without our help. The property management economy is being transformed by better real-time knowledge of our assets. There are investment opportunities with identified levels of profitability that institutional players can access.
Campuséa Grande Arche, La Défense
Tenant services. Even better, in the future, services will become increasingly embedded within our homes. Connected devices will open up our homes to new services for maintenance, supplies or even interior decoration. Rental will no longer be the only driving force for probability. Within this, owners will find a major source of growth, provided they can adapt and their practices and businesses can evolve. Rental real estate will require specific expertise and technologies: this is a mass business, serving consumers.
This is an important step. All these new technologies are paving the way forward for digitalization and industrialization, which will both save time and ensure better service for customers. Ensuring critical mass on residential is of course a key factor for the success of this deep transformation.
New markets are opening up, supported by residential.
In both cases, these investments will only break even in the medium term. They require specific expertise to be deployed on a massive scale, as well as regular and adapted monitoring. It will become increasingly difficult for individuals to manage technological and connected homes on their own. In the same way that no one repairs their car engines by themselves anymore, and instead rely on contracts for regular checks with their dealers, in the future, no one will want to manage their homes by themselves. Real estate companies are well positioned to accompany the technological revolutions with smart cities. They will also position themselves as partners for the public sector to modernize the urban environment and digitalize the rental offering. Alongside the positive general environment, we can see a revolution of uses and technologies that are opening up a wide range of opportunities for professionals. Value creation and the rationalization of portfolios and services, combined with investments and modernization, are expected to maintain and increase residential returns over the long term. Real estate companies represent a vehicle that is particularly well-suited to this reality, which looks set to attract both institutional investors and individual shareholders.
Source of financing. Real estate companies, supported by the SIIC investment trust status, represent a good vehicle for financing to develop the residential offer. For individuals, real estate companies represent a more simple and secure investment than acquiring a property in their own name. For institutional players, real estate companies offer their professionalism and the guarantee of good returns over the long term. They can therefore put together solid financing packages to support and create value with the development of an innovative rental housing offer. The current status for SIIC real estate investment trusts - or OPCI undertakings for collective real estate investment - is adapted for supporting such a strategy: what still needs to be put in place is an industrial offer aligned with the specific features of rental property.
This is where we can see the reasons why investors are returning to residential assets. Real estate companies – whose actual name is less and less aligned with their management and service activities – will be ideally positioned for these social and technological transformations. They will also need to transform themselves to capitalize on the opportunities and ensure they are not left behind by the progress made. If they achieve this, they will have made the successful step, like their distant ancestors, to accompany change, rather than enduring it, laying the foundations for sustainable and innovative growth.
Source: IEIF (Réflexions immobilières n° 82)
Executive Director Residential
A Polytechnique graduate and Ecole des Mines engineer, Franck Lirzin has held various positions with the French Ministry of Economy and Finance, notably in the Budget...