The private rented sector in the UK has traditionally been the preserve of the private investor, very often part-time landlords with just one of two properties to let. In fact, statistics show that around 70 per cent of landlords fall into this category.
But now, with the rapid growth of the UK market for PRS housing – less than 10 per cent of households in 1990 to around 20 per cent today – institutional investors are beginning to take an interest in the PRS.
[blockquote align=’right’]Invesco thinks, large investors could be missing out on attractive returns.[/blockquote]
Until now it has been seen as uneconomic for corporates to manage private rented housing, but economies of scale and tax incentives could challenge the status quo: corporate funding of large block developments is beginning to take off.
Needless to say, this could affect the market for the small landlord investor in some locations in the future.
International investment management company, Invesco, with offices in 20 countries, says institutional investors are significantly underinvested in the private rented sector (PRS), which they see as a potentially lucrative area of the real estate market.
The firm has identified the PRS as the fastest growing tenure and the “highest performing real estate asset class” in the UK, but says institutional investors currently own less than 5% of the sector.
A growing residential under supply issue means that there is a surplus demand for private renting in many areas, particularly the major cities and areas of high student and immigrant densities, which means, Invesco thinks, large investors could be missing out on attractive returns.
Invesco also thinks that the PRS has proved to be less volatile than other more traditional real estate investments, such as shops and offices.
Invesco’s analysis does a comparison between the UK PRS and the multi-family rental market in the US. It found that UK institutional investors are considerably behind their US counterparts in taking up these opportunities.
Director of Residential Investments at Invesco, John German had said that “the under-supply of housing and high population growth in the UK means that the PRS will continue to grow as a tenure, which potentially creates investment opportunities for institutional investors.”
The latest IPD UK Annual Residential Property Index shows that yield compression (increase in asset values), foreign investment and a lack of supply in the London market have led to institutional investors being priced out. On the other hand, the UK PRS as a whole saw a total return of 13.5% in 2014.
Invesco Real Estate, making its first UK private-rented sector (PRS) investment on behalf of a UK local authority pension fund, will buy 118 PRS units for £32.5m in Hayes, west London, from Willmott Dixon’s on behalf of its client. The client will purchase the site’s freehold and fund the scheme’s development, due for completion in 2016.
Invesco, German has said, began monitoring the UK residential sector in 2012 and made its first investments in Europe last year, spending €130m on two projects in Germany.
“Rents typically track average earnings and, while it’s not directly RPI, you’re getting an inflation-linked rental stream,” he said, pointing to the fact that London has a higher proportion of rent-paying residents than the rest of the UK. The London region, he added, was a natural first stop for both Invesco and its client when investing in UK PRS.
“PRS is a new sector for a lot of people and the most obvious choice is greater London,” he said. “It could be close to the M25 and not just within the M25.”
“There are a number of similar entities seriously looking at UK PRS as a realistic investment opportunity,” he said. “Returns compare favourably with core commercial real estate.”