EUROPE NEWS ANALYSIS: No place like home

According to the maxim “an Englishman’s home is his castle”, Brits should be allowed to do whatever they like in their own property. It could be part of the reason why institutional investors, such as pension funds and insurance companies, have never really embraced the UK multifamily sector as an asset class.

Tenanted property, after all, is extremely management intensive (think constant maintenance, unruly tenants, even non-payment of rent). One can also add to the list of turn-offs the difficulty of building scale in the UK.

However, the asset class is beginning to gain attention in Britain. Institutional real estate fund managers such as Aviva Investors, LaSalle Investment Management and insurer Aegon are each believed to be on the road trying to raise up to £500 million-plus (€600 million; $728 million), which, with leverage, they each hope to build into £1 billion rental accommodation portfolios.

The firms have been buoyed by the efforts of the former UK Labour government to encourage institutional investors to invest in the private rental residential sector. As it sought to tackle the UK’s lack of new affordable homes, the then-Labour government last year introduced the Private Rental Sector Initiative (PRSI) through the Homes & Communities Agency (HCA).

By releasing land to build on, the initiative is designed to attract UK pension schemes and overseas capital to invest – in scale – in the tenanted homes sector. Already, 64 expressions of interest have been received. The idea is that institutional fund money would work with the HCA to build new homes to be privately rented out.
At the time of press, Britain’s new Conservative/Liberal Democrat coalition government was preparing to unveil its first budget on 22 June. Supporters of the PRSI were hoping budget cuts would avoid the scheme, given such a strong showing of interest.
In April, a group made up of the Property Industry Alliance, Council of Mortgage Lenders and Association of Real Estate Funds submitted their response to a consultation on investment in the private rented sector in the UK.

The groups highlighted the fact that of the £62 billion under management by the top 10 investment managers, only 1 percent of that money was invested in residential property, far below the national average of the Netherlands, Germany, Spain and France.

“The residential sector may be the largest asset class in the UK, but for most institutional investors it remains effectively a new asset class,” the group said. “Investors will only be attracted to a new asset class if they can make material investment in the sector.”

The group went on to propose a number of things. Among them was the need to reduce the UK’s stamp duty land tax and the need to encourage tax efficient investment vehicles, including non-listed vehicles that would “attract new domestic and international investors, many of whom already have experience of similar residential sectors if a level playing field exists between private buyers and institutional ones”.

 Charles Whitworth, director of DTZ’s corporate finance team and who has worked with the HCA, said data by real estate data provider, Investment Property Databank, suggested the UK residential sector had outperformed commercial property over the last 15 years. “Sadly there will be some areas of the UK where this won’t work, but generally investor appetite is there,” he added.

Aside from the PRSI, private equity firms are finding reasons to invest in the UK residential market too. Last month, Graphite Capital, a mid-market private equity shop, made its foray into real estate with a £100 million investment in start-up housing developer, London Square.

The firm said the UK housing market was at a cyclical low and expected it to benefit from falling land prices, which have continued to fall since their 2007 peak, as well as constrained supply in London. Graphite senior partner Mike Innes added: “We see an opportunity to build a mid-market vehicle that will be attractive to larger players in due course.”

Alex Jeffrey, European head of MGPA, recently told PERE the story of UK residential was going to be very positive. “There is clearly lack of supply and increasing demand,” he said.