Institutional investors are set to revolutionise the private rental sector with approximately £30bn of institutional investment specifically earmarked for the building of new homes for rent in the UK. This is unprecedented where the UK has held a traditional tendency towards owning rather than renting property. The increase in (and Government encouragement) of institutional investment is set to shake-up the rental sector potentially changing the landscape for landlords for many years to come.
Since 2012 private rental has been the second largest housing tenure in England behind owner occupation, and is now overtaking social housing. The market is no longer being classed as the “private” rental sector but as a “professional” rental sector, where bigger landlords are creating bigger schemes and driving supply.
In the context of the national shortage of housing stock, the Government has increasingly looked to the private rented sector (PRS) to play a greater role in providing more new build housing. In 2013 the Government put in place the £1 billion Build-to-Rent fund, to build 10,000 homes specifically for private rent, as well as introducing The Affordable Housing Guarantee Scheme which has already committed to guarantee over £1.5 billion of debt for more than 13,000 new affordable homes, across 41 borrowers.
Build-to-Rent is defined by the government as ‘a fully recoverable investment where the government shares risk or bridges finance to help schemes to build, managed and let’. This allows developers to shift some of their risk onto the government, which in turn enables them to take on additional projects. A study by EC Harris reached the conclusion that the build-to-rent scheme “could have much wider potential across the UK than previously thought”. He went on to say that, “Indeed, the scheme could partially resolve the current housing crisis”
Who are typically institutional investors
- Public & Private Pension Funds
- Sovereign Wealth Funds
- Insurance Companies
- Government Agencies
- Endowments, Foundations
During the first six months of 2015 appetite for residential investment among institutional investors has never been higher, and large numbers are looking to trade out of other sectors to fund deals:
- Urban regeneration specialist Sigma Capital is the latest firm to announce it is entering the Build-to-Rent sector, seeking to construct and manage its own private rental properties. The company has raised £20m through a placing of shares and says it wants to “build its own substantial portfolio of PRS assets”. With the borrowing that the £20m will facilitate, Sigma expects to deliver approximately £50m of gross development cost in the first 18 to 24 months through building family homes across up to eight sites, with early schemes in the Greater Manchester and Liverpool areas
- In April, Estuary Housing Association, a provider of social housing in Essex, will be building 400 new homes by 2018, after borrowing £40 million from the international investment manager M&G Investments. M&G has now invested over £5bn in UK social housing
- Aviva Life and Pensions UK Limited sold the former Prittlebrook Industrial Estate in Southend, a cleared site of 26.41 acres, to Bellway Homes Limited for an undisclosed sum. Bellway Homes have been granted planning consent for 231 residential dwellings including affordable housing, a two storey hospice facility, and office space
- London saw the establishment in 2012 of the UK’s first institutionally backed PRS-only developer, Essential Living, a partnership between Essential Land and M3 Capital. In June 2015, three new Build-to-Rent funded developments were announced in London
- The Canada Pension Plan Investment Board (CPPIB) in June of this year purchased a £1.1bn portfolio with buildings across 17 of the largest university towns and cities in Britain. University digs are now increasingly viewed as an attractive asset class that can provide robust returns
- Some of the big spenders in the sector this year have been from overseas. LetterOne Treasury Services, backed by the Russian oligarch Mikhail Fridman, has paid £532m for five central London sites
- Countrywide plc”, the UK’s largest property services group, announced the launch of ‘Vista’ – a UK residential property fund for institutional investors. In August Vista Fund and Hermes Investment Management entered into an agreement to acquire Baltic Village in Liverpool for over £50 million
- German developer, Patrizia has entered the UK market with the acquisition of the 20-acre First Street regeneration area in Manchester, where it plans to build a 500-home PRS development. Patrizia said it is also planning to launch a dedicated UK PRS fund. The developer already manages 80,000 PRS apartments in Europe worth €7bn
- Matrix Homes set up a joint venture between the city council and the Greater Manchester Pension Fund to bring forward a scheme for new build homes for rent
- In London, Wandsworth Council granted planning permission for a 114 home Build-to-Rent scheme within a 500 home development by Bellway Homes in the Nine Elms regeneration area in Battersea
- Legal & General made its first direct PRS investment in February. The insurance company, which aims to invest up to £1bn in the sector, bought a £25m regeneration site in east London, two years after first announcing its intention to invest in PRS
Andrew Taylor, the Head of Residential Investment, at Internos stated “the Global investor trend is likely to continue against a backdrop of global market volatility and persistently low bond yields and there is an obvious opportunity for institutional investors looking for liability matching returns that can be found in the UK residential market.
Melanie Leech, chief executive of the British Property Federation, said: “Ultimately, what will help tenants best is more investment in housing. Pension funds and other institutions have billions to invest in this market – developing places that would provide a new generation of high-quality homes that offer greater choice to renters, including the option to sign longer tenancies.”
Property chiefs welcomed the statement made by Brandon Lewis, the Government’s Housing Minister, when addressing around 800 delegates at Celtic Manor in Newport, Wales in August. He pledged to remove red tape holding back investment into Britain’s growing rental market funded by Institutions:
“Councils should rise to the challenge of devolution” and should seek to “merge third party capital with their land holdings”.
Many developers believe building homes for rent using land or old buildings owned by councils or government departments could provide long-term income for the public sector. Such deals could see councils converting old offices blocks into vital homes for rent without selling off valuable assets.
The Property Magazine International stated after surveying 63 Institutions and Real Estate Investors 62% of those polled is planning to invest in the next 12 months and 69% over the next three years. There is still some way to go before the UK reaches US levels of investment. “For UK pension funds, investment in PRS has moved from being a political necessity to an investment decision. It’s not necessarily coming from house builders, it’s more from contractor-developers and it’s a model structure that can be replicated”.
The questions landlords might want to ask themselves are:
Am I ready for this shake-up in the rental market?
What impact will these institutional investors have on raising the standard of properties available for tenants?
Are there opportunities in relation to working with an institutional investor or becoming a strong regional independent?