Buy-to-let Olympics

How the 2012 London Games could provide a blueprint for institutional investors interested in Britain’s private rented sector.

With the 2012 Olympics kicking off in London today, the games – or more accurately, the development required to make them happen – serve as a timely reminder that demand exists among institutional-type investors for large-scale private rented investments in the UK.

Last year, Delancey, the London-based private equity real estate firm, and Qatari Diar, its sovereign wealth fund partner, agreed with the Olympic Delivery Authority to buy 1,439 of the 2,818 flats at the Athlete’s Village and let out the majority of them. Together, the pair is making a huge commitment totaling £557 million (€708 million; $875 million) and will create the first UK private sector residential fund, with more than 1,000 homes to be owned and directly managed.

In so doing, Delancey and Qatari Diar are providing a clear example of how international interest in the UK residential sector could develop. Indeed, if it all goes well, their Athlete’s Village investment could turn out to be a blueprint for others to follow – in more ways than one.

Not only is it unusual to seek to rent out homes in the UK rather than sell them, Delancey and Qatari Diar also are looking to change the standard private rental lease length. While the UK private rented sector is characterised by short lets of 6 and 12 months, Delancey and Qatari Diar are looking at renting out flats on five- or perhaps 10-year terms.

As soon as the games are over, the buildings at the Athletes Village will get remodelled. Delancey and Qatari Diar then will start to take possession of the one- to four-bedroom flats, which they will let out using their own management company. The pair will let out at least 75 percent, if not all, of the 1,439 flats they have agreed to acquire.

Delancey and Qatari Diar are doing this because they believe in the UK rented sector and were fortunate enough to find a project that the government wanted to happen. However, for greater involvement in the private rented sector, the UK government needs to find ways to encourage institutional investors further in this undeveloped field, and certainly remove any barriers to entry.  To that end, a government-commissioned report led by Sir Adrian Montague, 3i’s chairman, is due to be published imminently.

Already, parts of the report appear to have been leaked. There are suggestions that the UK government is likely to conclude that institutional investors want to get their hands on large-scale schemes that offer economies of scale, rather than a hodge-podge of smaller schemes more suited to the world of the traditional buy-to-let investor. More importantly, it is likely to make recommendations accordingly.

That seems encouraging. As Stuart Corbyn, chairman of the Qatari Diar Delancey Athletes Village, told PERE, it does indeed need “bulk” to make buy-to-let interesting to institutional investors. He explained that Qatari Diar and Delancey were not just making a ‘big’ commitment, but a ‘potentially enormous’ one going forward. Not only have they agreed to buy 1,439 flats at the Village, but the investment also includes half a dozen development sites with outline planning consent for another 2,000 homes.

There is no question that the UK needs institutional investors to get involved in helping British housing via involvement in the private rented sector. The London Olympics might just supply a glimpse of how that can work and provide a lasting legacy to boot.