Manufactured, or prefab, homes are an answer to the spreading shortage of housing for a generation of emerging households, combining affordability and mobility and offering investors a source of growth and income.
The Dutch housing market is now in its sixth year of steep price increases after the recession triggered by the 2008/2009 Financial Crisis, putting owning a traditional home out of reach of many Dutch households particularly in the big cities. This is not an isolated process: it is being repeated in major cities across Europe and North America, with younger households in particular, struggling to find affordable housing to buy or rent.
The housing shortages enveloping many of our capital cities across Europe and North America are becoming more pressing as supply fails to meet outsized demand. London, for example, needs 65 000 new homes every year to meet demand, according to the London Plan. However, to date, attempts by the public and private sectors to address such shortages have been mostly modest.
Filling the gap: a shortage of solutions
This predicament has presented interesting residential investment opportunities in major growth cities. The Dutch market is a case in point: rent increases in the private rented sector are outstripping price and wage inflation in the largest cities, but have also raised concerns about affordability. Equally, in markets such as Berlin, prime residential rents have risen steeply in the past 10 years, leading to a burgeoning campaign to nationalise the city’s private rental stock.
Clearly, many cities have failed to consider affordable solutions and as a result a generation of emerging households has fewer options. Manufactured homes have been identified as one of the answers to this spreading challenge, with the sector’s growth in the US reflecting the potential for this type of housing for lower income households. Real estate investment trusts (REITs) have been prominent providers in this niche, but growing sector.
Exhibit 1: A solution to the shortage - prefab/manufactured/mobile/tiny houses
The mobile option
Affordable solutions for urban housing shortages are undeniably complex. Land in most of the fastest growing US and European cities is neither plentiful, nor easy to entitle, while demand looks unlikely to decline. Low-cost home ownership options come in many forms, depending on income levels, across social housing, the private rented sector or hybrid, low-cost forms of home ownership. In the US, tax breaks historically stimulated low-cost housing, but they have recently been scrapped by the Trump administration.
Manufactured, or mobile, homes are starting to be considered by many as a serious solution in the US. These homes are normally 30 m2 or more and typically have a permanent chassis to assure the (initial) transportability, distinguishing it from prefabricated homes such as modular homes. Typically, they offer residents affordable homeownership in communities located in some of the most desirable housing markets in the country. They currently make up 6.5% of the US housing sector and house an estimated roughly 22 million (source: US Manufactured Housing Institute, June 2018).
Manufactured homes save money on labour and land, two of the key components of housing costs. They are largely assembled in factories and then transported to the sites of use. Sale prices averaged USD 82 000 at the end of 2018, according to the latest US Census Bureau data, less than a quarter of the average for new single-family homes of USD 381 000.
Exhibit 2: Annual shipments of manufactured homes to dealers in the US
In thousands of units; source: US Manufactured Housing Institute, March 2019
Occupancy, rents attract REITs
Institutional investors are increasingly attracted to the sector: they are looking at the private markets for manufactured housing investment vehicles as well as other forms of affordable housing. There are three well-established public market REITs in the US managing around 286 000 units located in more than 900 properties, as well as providing spaces for recreational vehicles and, increasingly, tiny homes.
These companies provide accommodation for all ages as well as for age-restricted communities, usually those over 55. REIT investors have been attracted to the sector’s high levels of occupancy and strong rental growth. As exhibit 3 illustrates, these companies have historically outperformed their peers in the broader US REIT market.
Exhibit 3: US manufactured housing REITs –characteristics and performance
Source: Bloomberg, 10 May 2019. As a result of currency fluctuations, returns can increase or decrease.
Manufactured housing: not always a popular solution
Manufactured homes could help solve some of the shortages emerging from urbanisation, but they are not without critics. The image of manufactured homes can at best be described as mixed. Popular culture of the last 30 years has unflatteringly portrayed the sector as seedy and occupants as “trailer trash”, generating resistance from town planners.
Indeed, despite the affordable housing crisis in the US, some communities have worsened what has been a challenging situation: municipalities have used zoning and other land use regulations to restrict or eliminate manufactured housing.
Getting mortgage finance for a mobile home can be a further challenge. However, US government housing finance agencies Fannie Mae and Freddie Mac are slowly expanding their purchases of mortgages to include loans which are typically used to fund manufactured homes on leased land, reversing a policy that has been in place since the early 2000s.
Building for the future
Manufactured homes are often hidden away at the fringes of towns and cities by physical or regulatory barriers and the sector undoubtedly faces challenges in becoming a mainstream option. But REITs in particular have taken major steps to overcome widely-held negative perceptions of factory-made houses. In addition, private equity accounted for 17% of trailer park transactions in 2018 in the US compared to 9% in 2013, reflecting the growing interest in investing in the sector, according to a recent Financial Times article.
Manufactured homes have not been a trendy cause for housing campaigners. However, cuts in the value of tax breaks for low-cost affordable housing construction and shrinking direct government support are making factory units not only a more affordable alternative to a traditional single-family house in the US, but also an appealing one. Shaking off the trailer-park stigma, the chances that the concept is embraced in Europe as well should improve.
 Private equity moves into trailer parks, Financial Times, 20 May 2019
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