A UK multifamily revolution

The UK’s private rented sector was given a major boost this week by the country’s government, unlocking the potential for a US-style multifamily revolution.

They say an Englishman’s home is his castle, but when it comes to institutionalising the residential rental sector the British have tended to adopt an attitude of raising the drawbridge and lowering the portcullis instead.

Despite the fact that an additional one million households turned to the private rented sector over the past four years, helping push the number of households in the multifamily sector, as the US dubs it, from 2.4 million in 2005/2006 to 3.4 million in 2009/2010, roughly 75 percent of all landlords today are still private individuals and couples. Furthermore, just 10 percent of landlords are property companies.

For decades, government efforts to encourage institutional investment in the sector have been severely lacking. Until this week, that is.

On Wednesday, the UK Budget unveiled new measures that would not only reduce the amount of tax on bulk purchases of rental apartments but also relax corporate regulations that could result in a flurry of US-style apartment REITs entering the market. By changing the basis upon which the stamp duty rate (the tax on property transactions) is charged, in some cases reducing it from 4 percent to 1 percent of the total value of the portfolio, and by lifting a 2 percent charge on converting a property portfolio into a listed REIT, Chancellor George Osbourne has been praised for helping “unlock” the British multifamily market.

Well, it’s about time. Take just a cursory glance at the US multifamily sector and it’s clear to see a sector – even in secondary and some tertiary markets – that is leading America’s real estate recovery. Deemed one of the safest real estate bets in the current environment, thanks to great demographics, a lack of supply and cheap financing, the US multifamily sector has seen a surge of capital enter the field, helping push average cap rates down to 6.7 percent and to the 4 percent range for trophy assets in prime locations. For institutional investors, US multifamily remains the sector of choice, with rental apartment investments now the “gold standard” for institutional portfolios, according to the 2011 Emerging Trends Report from the Urban Land Institute and PricewaterhouseCoopers.

Of course, the UK may not have America’s government-sponsored entities, Fannie Mae and Freddie Mac, to help keep the mortgage market moving, but it does benefit from similar demographics, not least a dramatically rising number of single-person households and a severe lack of new homebuilding. Coupled with annualised returns of 10.4 percent for investment-grade residential rentals in 2010, it’s therefore curious to realise that institutional investors have played such a minor role in British multifamily to date.

With a little the help from the UK government, however, perhaps even the rented English castle finally can start being called home.