Canada’s largest pension fund and transatlantic real estate investment firm Kennedy Wilson are banking on the UK’s single-family rental housing market following the US and becoming an institutional asset class.
Last week, Canada Pension Plan Investment Board (CPP Investments) announced that it was committing an initial £500m (€600m) to a new joint with Kennedy Wilson target the subsector. The C$647bn (€434bn) Canadian fund will hold a 90% interest, while Kennedy Wilson will commit £56m to become a 10% shareholder.
Mike Pegler, president of Kennedy Wilson Europe, tells IPE Real Assets that the investment rationale for the programme is founded on the demand-supply imbalance in the UK. “Over decades, you’ve seen housing targets missed again and again,” he says. “The UK just hasn’t built enough houses, and that means there just aren’t enough rental houses at the moment.”
At the same time, a shift from private to institutional ownership of rental housing is underway. There are still over a million rental properties in private hands, but this is expected to decline, helped by the withdrawal of tax benefits under the previous Conservative government.
“We haven’t seen large-scale institutional ownership of rental housing in the UK,” Pegler continues. “And we think this is an opportunity to create the kind of market we see in other parts of the world. To deliver high-quality, new-build, institutionally-managed quality product for renters. That’s something the UK market has been lacking. We’ve seen a lot of growth in the institutional ownership of single-family housing over the past 10, 15 years in the US. And we think that is a trend that’s likely to come here. More investors are looking for opportunities in the residential space.”
Tom Jackson, head of real estate Europe at CPP Investments, concurs. “The single-family residential sector in the UK is becoming increasingly institutionalised,” he says. “It’s a sector that we have had our eye on now for a number of years. For the first time in a long time, we’re seeing a real pipeline of scale, which is important for institutional owners and historically has perhaps inhibited the deployment of capital into the sector. We see that changing. We think there’s a real scale opportunity in the UK to deliver product that the consumer needs and wants.”
Both investors have placed an emphasis on the provision of local amenities and the role of housing in the broader community. “It’s crucial that the amenities are there for the community as a whole,” Pegler continues. “And that’s an important factor when we’re looking at where we want to make our investment and to build our communities. We’re looking at places where there’s employment growth, where there’s population growth, where there’s great connectivity. Where there’s schools, and where the amenities are there that any residential community desires. I think that broader offer of the things that attract someone to a place and make them want to live there is important as we think about building our communities going forwards.”
Another important element is energy efficiency. “We talk to the house builders about the specification of these houses and we’re going to bring forward energy-efficient houses, which again is what tenants want and what society needs,” says Pegler. “This is all part of the professionalisation of the UK rental market as it moves away from small-scale private owners who have struggled to achieve energy efficiency. We want to bring institutional-quality management of the sector. And being able to bring forward the type of energy-efficient product that doesn’t exist at scale in the rental market is a strong competitive advantage. It’s what tenants want.”
Housing for everybody
In Pegler’s words, the JV is not targeting “affordable housing with a capital A”. He explains: “It’s housing for everybody. This will be mass-market, two, three, four-bed homes for rental across the country. It’s new-build house-builder stock, from top-10 house builders building urban extensions to urban regeneration projects. It’s the acceleration of housing delivery for people across the market.”
As such, the focus ties in with the government’s strategy on housing and urban renewal. “House builders in the UK have historically built for the owner-occupier market,” Pegler continues. “Working with us to bring forward rental communities at scale, enables them to accelerate their pipeline, and is a clear enabler of additional housing and accelerated housing delivery. We would welcome measures to ease the planning system and to enable us and the house builders to bring forward more stock. And it feels like that is the direction of travel that the government is pushing in.”
This perhaps helps explain both players’ enthusiasm for the UK market. CPP Investments has about C$9bn (€6bn) in European real estate today, and two thirds of that is invested in the UK. Jackson says: “We remain absolutely committed to investing in real estate in the UK. I think there’s a real scale opportunity in this market. You’ll see us deploy meaningful capital into this joint venture.”
Pegler agrees, dismissing concerns around a decline in business confidence. “I think the UK remains an attractive place for international capital. When we speak to investors more broadly, the UK is on their radar and continues to have a good reputation. I think there will be many opportunities to bring new investors to the UK over the course of the next few years.”
