UK private-rented sector: Holy Grail or a no-go?

Institutional investment in the UK’s private-rented sector is no longer the “Holy Grail”, according to a residential investor.

Speaking at a British Property Federation conference this week, Residential Land chief executive Bruce Ritchie said institutional money was already invested in the sector.

“I would argue that it’s already happened,” Ritchie said, citing Aberdeen, Apollo, Aviva Investors and APG as examples.

Despite residential being worth £5trn (€6.9trn) – making it the largest property asset class in the UK – institutional investment is only 1% of the total residential market.

By comparison, 35% of the smaller commercial real estate sector is held by institutional money.

Ritchie said the main drivers for institutional investment in residential property included improved reporting of the sector, increased lot sizes and void and management costs comparative to commercial property.

The current UK government, Ritchie said, is open to institutional investment in the residential sector – which has outperformed commercial property over the last 30 years.

JP Morgan Cazenove equity analyst Tim Leckie said there was competition between short-term “flighty money” and funds looking for yield and growth.

“There’s a magic 4-4.5% yield,” Leckie said. “Cross that, and then the big guys come in.”

Competition from increased foreign demand for UK residential is “the biggest hurdle” for institutions looking to invest in private residential property, Ritchie added, with many buyers coming from abroad.

Over the 12 months to June 2013, 49% of all £1m-plus sales in PCL went to foreign buyers.

However, BPF chief executive Liz Peace has previously cautioned against parochialism.

“In a world where, increasingly, the opportunities are international, we should be careful we are not seen as sending out the wrong signals that the UK is becoming more parochial and protectionist,” Peace said in a BPF statement.

Knight Frank estimates that the private rental sector could grow by 32% to 5m dwellings by the end of 2016.

Barclays Corporate Banking head of real estate Fiona Freeman said: “It’s a growth sector, and being able to lend into that has to be seen as a positive.”

First Property chief executive Ben Habib this week told IP Real Estate institutions were much more likely to buy a “£100m office block” than make a play for residential property.

“The stock simply isn’t there – which means you then have to consider developing it,” said Habib, who has recently invested in office to residential conversions. “It’s cultural – and quite the opposite to Continental Europe.”