UK - A government-commissioned review into barriers to institutional investment in private-rented housing has warned about an undersupply of large-scale projects and a likely aversion to funding assets at the development stage.
The Montague Review, published today, pointed to "the need to create greater confidence among investors in the availability of good projects showing acceptable, secure returns".
Led by Sir Adrian Montague, has put forwarded a number of proposals, including the use of flexibilities in the planning system to enable developments of privately rented homes.
The British Property Federation (BPF) immediately urged the government to heed Montague's recommendations. Liz Peace, chief executive of the BPF, said they would "help address the barriers cited by the institutions and provide an inclusive model" but warned that "today is not the end of the journey" but rather the "start of one".
The review acknowledged that the private-rented sector was not meeting institutional investors' diverse expectations. "Some institutional investors view residential property purely as a financial asset and seek to invest in the stable long-term income returns offered. In general, pure income investors of this type do not assume development risk and would not, therefore, commission new-build homes," said the report.
Despite an overall total return for residential property of 9.6% over 10 years - compared with 5.7-7.3% for commercial property - land, construction and management costs will have to come down to meet investors income return targets.
Robin Goodchild, International director at LaSalle Investment Management and chair of the Investment Property Forum (IPF) residential special interest group, pointed to the report's encouragement of a more affordable net initial yield compared to that available now. "For new housing to be seen as affordable, it has to be able to lower the cost of provision without lowering yields," he said.
Moreover, potential first movers in the sector were demanding a premium to compensate for "the apparent novelty" of the sector and the lack of comparisons, according to the report. "Several investors we spoke to had pulled back from investing because they were unwilling to be the first mover in an expansion of the sector. This was particularly true of overseas investors, who were unwilling to invest when UK investors were holding back," it said.
Yet the report focused primarily on constraints affecting supply, notably planning. Local authorities featured heavily in the report, which recommended the central government encourage them to make use of existing planning rules to promote private rented schemes.
The commission, which was also tasked with identifying whether earlier measures had been effective, concluded that tweaks to the REIT regime, "while positive in their impact, have not of themselves stimulated an incremental flow of institutional investment into new housing built specifically for rent".
The government commissioned review as part of a housing strategy, with a review group that included Graham Burnett, head of real estate at the Universities Superannuation Scheme. Yet pension funds were only tangentially addressed by the review - via a case study from Greater Manchester Pension Fund - despite an earlier submission from the IPF suggesting around half of pension funds intended to invest in the sector.
Goodchild, who was behind the IPF data, said today's report was "subtle" on the potential for institutional investors to participate in the market but described it as "hugely encouraging". He said it was now up to the government to accept and implement it.
"The minister has made all the right noises but hasn't committed himself," he said. "We will have to wait for the government's formal response."