Into the mainstream

Institutional investment in the UK residential property market has been a slow burn. Much talked about and vaunted for the last 20 years, only in the last five years has it truly gained traction.

Compared to the student housing sector, institutional investment in privately rented homes for the wider population remains relatively immature. But it is developing fast, with a switch in focus to stock built specifically for the rental market. The amount of operational Build to Rent stock has increased by 26 per cent in a year. The amount under construction has increased by 33 per cent.

The case for investment has been made many times before: restricted access to home ownership entrenched by mortgage regulation; changing lifestyle choices underpinning growing rental demand; potential for secure, inflationary income streams from an asset underpinned by a strong track record of capital growth, and so on, and so on.

Five years ago, this was being set against the barriers to entry. The lack of oven-ready portfolios of scale, the challenges of developing without recognition or support from housing and planning policy, the granularity of the asset management and the need for new finance models.

Endless reports and conferences, not much real action. There was no single identifiable catalyst for change. However, M&G’s acquisition of the Berkeley residential portfolio in 2013 was evidence that UK funds were in the game. Delancey grasping the opportunity presented by the Athletes’ Village at Stratford was perhaps an even more important moment. It turned the theory into practice and delivered proof of concept for the first time.

This has been supported by a group of pioneers such as Sigma, Quintain and Long Harbour who have worked through the issues of planning, design, delivery, management and branding, while long term players such as Grainger have evolved to keep pace in a changing market. At times it has been a process of trial and error. But that has fuelled innovation in all of these areas, learning lessons from the well-established student housing sector and the multifamily sector in the US along the way.

Starting to shift

And so the mind-set of investors has begun to change. They have increasingly committed to the idea of delivering truly long-dated income streams, letting go of the comfort blanket offered by potentially flipping stock back into the ‘for sale’ market.

Indeed, we have seen this turned on its head as an active diversification strategy. Developers are actively looking to incorporate Build to Rent product in what otherwise would have been for-sale developments.

At the same time, we have seen the beginnings of a shift in government policy, one which is much more supportive of delivering new housing stock across a much wider range of tenures, as a means of effecting a step change in housing delivery.

So are we on the cusp of an explosion in activity?

Fundamentally, this depends on the economics. Do the returns justify the risks? Not just for mature portfolios but also for those entering the sector via forward funding transactions or direct development where there are additional planning, development and stabilisation phases, with their associated risks?

Can the sector compete for investors’ attention when the returns from other asset classes, not least of which cash, are set to rise? What is needed to accelerate deployment of the oft referred to ‘wall of money’ pointed at the sector?

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