This article was first published on 13 March 2012 in I&P Real Estate Magazine by Shayla Walmsley
UK residential has long been considered an untapped investment opportunity for institutions. The debate has finally moved on from ‘why’ to ‘how’, writes Shayla Walmsley
More than a decade has passed since proponents of the UK residential market began predicting an imminent influx of institutional capital into what has for some time been a fragmented and mainly owner-occupied real estate sector.
The market is still fragmented 10 years on and still dominated by owner-occupiers. But new investment propositions are targeting the sector. On the one hand, there is a build-to-let model predicated on substantial growth in the private rented sector and an overall decline in home ownership. On the other are co-investment propositions, such as the Mill Group’s Investors in Housing mortgage scheme, which has identified demand for non-rented housing among individuals at a time when first-time buyers are struggling to obtain traditional mortgage financing.
Which model investors prefer will depend on whether they see the current shift towards renting as a short or long-term phenomenon. If they believe the former – largely the result of mortgage lenders’ capital constraints – it makes sense to step in and provide capital. If it is a more fundamental, long-term trend, the build-to-let model is more likely to appeal.
Major undersupply of housing in the UK points to an underlying demand that only strengthens the investment case. But in the private rented sector it is one of the main reasons investors have been hesitant to invest. The UK government has exhorted pension funds to divert some of the £120bn (€144.9bn) invested in commercial into residential, primarily new housing stock. Yet in its November submission to the UK Parliament, the British Property Federation pointed out that much of the stock held by existing investors was acquired rather than built.
Where assets are available, they tend to come in small lots. Despite being one of the largest property managers in the country, property management firm Touchstone Residential has a portfolio of around 20,000 units, compared with a US property manager with, say, 200,000 units.
“How do you buy a large enough portfolio,” asks Touchstone Residential managing director John Midgley. “Compiling a portfolio three houses at a time is a long and risky process.”
Investors with experience of dealing with the intricacies of residential still want large portfolios. When Swedish foundation Akelius moved into the UK residential market last year, it did so by acquiring a 16-unit portfolio from Terrace Hill. But, in the medium term, within three to five years, it plans to acquire 10,000 units in and around London.
“There are people who definitely see that our rented sector is less developed, somewhat more archaic than other centres,” Chris Lacey says. “Akelius can see there is a gap in the market and there is something to be done.”
David Toplas, CEO of the Mill Group, claims local planning regulations and local authority requirements that developers build infrastructure along with new housing make it difficult to launch large-scale developments. “One of the benefits of investing in both existing assets and developments is that there are no constraints,” he says. “Investors can make a strong economic case for buying existing assets.”
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