Big investors begin entering the UK residential rental market
|Friday, 05 April 2013|
Insurers and pension funds are poised to spend £7 billion on rental homes in the UK because they believe that the current shortage of housing and mortgages is producing a generation of renters rather than owners.
About 30 institutions including British pension funds and American private equity firms plan to develop or buy blocks of homes to let, encouraged by stable returns compared with shops or offices and by government pledges of financial support, according to property consultant CBRE.
The firm points out that that they are attracted by the 4% plus returns on property, against less than half that for the safest European government bonds.
‘Things have changed in the past six months. There's a real need for institutional money, and it has come at a time when the institutions are looking for safe, sustainable streams of income,’ Chris Lacey, CBRE's head of residential investment, told Reuters.
It is estimated that the UK needs 230,000 new homes every year but just 90,000 are currently being built and also first time buyers are finding it hard to get onto the housing ladder because of the large deposits needed.
One of the first big firms to enter this sector of the property investment market is Prudential which has agreed to buy 534 residential properties from developer Berkeley Homes for £105 million, the first big deal in recent years by an investor in UK rented housing.
Others planning to enter the market include Oaktree Capital of the United States, and British insurers Aviva and Legal & General.
‘Historically, you end up with a higher return with lower volatility with residential versus commercial real estate. The main problem has been access to appropriate stock that's well managed at a sufficient scale,’ said Bill Hughes, head of Legal & General Investment Management's property arm.
The total return for UK private rented housing, which includes rental income and rises in property values, was 8.9% in 2012, outperforming the 2.7% return from offices, shops and warehouses, data from Investment Property Databank shows.
Residential returns are typically higher because the value of the property rises more than commercial real estate. Investing in a block of flats is also a safer bet than an office tower because of the lower risk of empty space at any one time, though the higher returns are reduced by the costs associated with managing a large group of tenants.
The fact that the UK government has plans to boost housing is also attracting these big firms to invest in property. Ministers announced last month that funding for developers that want to build rental houses would be increased fivefold to £1 billion.
There were 3.8 million households living in private rented accommodation in 2011/2012, the highest level since the 1990s, according to UK government figures.
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