Published on Sunday 1 January 2012 09:00
A major expansion in Britain’s private rented sector is on the cards as major financial institutions, including banks, insurers and pension funds, prepare to invest billions of pounds into providing homes for rent.
Since the end of the Second World War, these mighty institutions have generally avoided much involvement in providing accommodation, because they have been unsure of the returns and fear the prospect of complex management problems.
However, with equities in such poor shape, interest rates at rock bottom and global financial systems dangerously stretched, bricks and mortar is becoming an increasingly attractive option as rents continue to climb.
The latest figures from HM Revenue and Customs indicate that financial institutions ploughed £2.2 billion into houses and apartments in the UK in the 12 months to April 2011 – a 189% increase on the previous year, when the total was £765 million.
Jeremy Raj, head of the residential property team at City lawyers Wedlake Bell, says: “There has been a startling jump in purchases of UK residential property by institutional investors.
“Institutions are being attracted to residential property because of improving market fundamentals, including high tenant demand, high rents and a supply shortage that shows no immediate signs of abating.
“It will be interesting to see whether this sudden surge is able maintain its momentum in the year ahead. One area which has seen strong investment is the student accommodation market, both by UK and overseas institutions.”
Rents rose for nine consecutive months to November, to an average of £720 per month. And Wedlake Bell says the shortage of homes in the South East that is underpinning high rents is unlikely to be alleviated in the short term.
Raj explains: “One effect of the credit crunch was to freeze the new build pipeline, meaning the current shortage of properties on the market is unlikely to abate in the near term.
“Unsold housing stock from the new build boom prior to the credit crunch has now been cleared up, making the current shortage of quality rented accommodation more acute.
“In addition, it seems unlikely that any public sector-led affordable homes initiative will meet the shortage of affordable homes.
“The Government’s proposal to extend the Right to Buy scheme might actually mean that more affordable housing is taken out of the public sector.”
Raj says the Government is trying to attract investment in residential property by major investors such as financial institutions to stimulate the building of new homes, which might be feeding the increase in purchases.
In July, UK Regeneration teamed up with Barclays Capital to launch a £3 billion private rented residential vehicle. Its aim is to build 20,000 new homes across the country by 2020.
The fund intends to buy local authority land under the Government’s “build now, pay later” programme, and has announced its intention to target town centre and inner city sites of around five acres.
Of the first three sites, one is in the North East and two in the South East – and housing minister Grant Shapps has already given his firm backing to the plans.
Raj says that stamp duty breaks were introduced in the 2011 Budget to stimulate investment by calculating stamp duty on the average value of the properties in a large investment, rather than assessing each property individually.
Prior to those changes, institutional investors were effectively penalised when buying more than one property, in comparison to single unit investors.
The Government might also be considering allowing investors to benefit from tax breaks on capital gains by investing through real estate investment trusts, which are currently only available for commercial property investments.
Wedlake Bell says that this acceleration of purchases by financial institutions reverses years of low investment by them in UK residential property.
Raj adds: “Financial institutions were reluctant to invest in residential property as they felt that the relatively high costs of managing a residential portfolio, made up of so many small individual properties, cut too deeply into returns.”
If plans currently under consideration are fulfilled, this Government could build a reputation as the restorer of the private rented sector which rivals the triumph of Margaret Thatcher’s years in her massive build-up of owner-occupation.
One household in five in Britain could be in the private rented sector by 2016, says an analysis from agent Savills.
Savills research bulletin says: “The dramatic increase in demand for private rented accommodation since the credit crunch should provide an opportunity for large scale investment in the residential sector, particularly given a lack of activity among buy-to-let borrowers.
“New entrants such as London Stamford and Capital Counties and joint ventures between the likes of Grainger and Bouygues are evidence that new investment in the sector is starting to materialise.
“Currently it is not the institutions leading the way, something the previous government hungered for during their investigations into the sector.
“Despite an increase in the amount of marketed investment stock, new investors’ income yield requirements remain above those available across the majority of the market.
“In particular, geared investors struggle to operate a sustainable model outside hybrid sectors like student housing.
“Equity-rich investors are leading the charge in the conventional residential investment market, but still seek to balance yields with underlying break-up value and effectively acquire with wholesale discount.”
The agent believes a major shift is under way in perceptions of the sector, partly because yields are rising strongly in areas where property prices are falling.
In areas where owner-occupiers are fewer in number and they are heavily dependant on mortgage finance, lower capital values prevail and income returns increase.
Savills believes gross yields for one-bedroom properties in the North East stand at 6.0%, while four-bedroom properties in the South West return around 3.6%.
Similarly, gross income yields for one-bedroom properties in, say, Barking and Dagenham stand at around 7.0% compared with yields of 3.9% on four-bedroom houses in Wandsworth.
Investors are yet to fully appreciate the availability of these higher yielding assets, though reduced yields on other asset classes and a scarcity of blue chip commercial property investments should change this position.
By 2016, says Savills, Grade C stock in the North of England could be delivering an annual yield as high as 9%.
Portfolio investments in the North are more likely to be acquired as long-term holds on the back of current yields and future rental growth.
Another report in November from Grainger, the company which owns homes worth £2 billion and is Britain’s largest listed residential landlord, predicted half of all households in 15 years’ time could be living in rented accommodation.
Grainger estimates there are currently 3.3 million homes in the private rented sector, alongside 3.65 million rented from local authorities or public sector landlords such as housing associations.
According to Wedlake Bell, the total value of purchases in residential property increased by 24% from £346 billion last year to £429 billion in the year to March 31, 2011.