Institutional investors have amassed a collective war chest of around £20 bn (around €24 bn) to pump into the residential sector in the UK, according to Chris Lacey, executive director of Central London residential investment at CBRE in London.

Institutional investors have amassed a collective war chest of around £20 bn (around €24 bn) to pump into the residential sector in the UK, according to Chris Lacey, executive director of Central London residential investment at CBRE in London.

‘Institutional investors have amassed around £20 bn that they are looking to invest today in the private rented sector (PRS) in the UK,’ Lacey told PropertyEU. ‘That’s a lot of fire power and, chances are, they have even more to spend than that.’

Lacey estimates that around 60% of the combined war chest is likely to be held by international investors, with domestic investors accounting for the remaining 40%. The PRS sector accounts for the lion’s share of the institutional residential market in the UK, at more than 80%, said Lacey.

Between December last year and end-March this year, around £2 bn of PRS deals were transacted in the UK, mainly in London. ‘This year, we could see as much as £5 bn in PRS deals in the UK, including regional cities such as Manchester and Bristol,’ Lacey added.

One such PRS project is the Tribeca Square project in the Elephant & Castle borough in London, which is benefitting from a slew of new developments as part of a wider regeneration drive. It is currently being developed by UK property developer Delancey and Dutch asset manager APG.

Together, they acquired the project in December last year which will be turned into a new ‘South Village’, with an investment volume of around £1.25 bn. The project comprises 373 rental apartments, 272 student units, 49,000 sq ft (4,500 m2) of commercial space as well as a supermarket, cinema and restaurants. The deal also included the purchase of the adjacent Elephant & Castle shopping centre, which will be redeveloped to include 1,000 apartments. Construction is due to be completed by end-2019.

Such is the interest in the UK residential market that it could conceivably rival the commercial real estate market within just five years, according to Andrew Pratt, senior residential advisor at German investor Patrizia in London.

RETURNS
Speaking at German investor Patrizia’s conference in London last week, entitled ‘Value for money: No return without risk’, Pratt said that the residential sector’s strong performance was pulling in investors: ‘Within five years, there’ll be as much invested in resi as commercial property in the UK. For the past 13 years, resi has consistently outperformed the stock market to become the top performer of the period,’ Pratt said.

On average, in the past 13 years, the UK IPD TRI residential index provided a mean annual return of 11% compared to 8% for the UK IPD TRI All Property index, 6% for the FTSE All-share and just 4% yield on gilts, according to the IPD. As such, the resi market in the UK outperformed office, retail and industrial properties in the period. The main performance driver has been capital growth, according to Pratt.

In London, prices in many boroughs are already up 30% on 2007 values. Recent data from the Office for National Statistics (ONS) shows that London prices have risen by an average of 17% over the past year alone. The average house price in London today is £459,000, according to the ONS.

BUBBLING UP
Subsequently, there are growing concerns that house prices, particularly in the southeast of the UK, especially London, are once again spiraling out of control. Last week, Britain’s biggest lender, Lloyds Banking Group, imposed new restrictions on its lending policy by capping applications for mortgages in excess of £500,000 at no more than four times a borrower's salary. The move has sparked speculation that other lenders will now follow suit. The move also followed a warning by Bank of England governor, Mark Carney, that large mortgages of up to five times income are a cause for concern that ‘could store up bigger problems for the future’.

However, for now, investors appear undeterred. A significant increase in competition, coupled with the low availability of existing product, has seen yields contract sharply in the last year, especially in Greater London. Gross yields in zone 1 stand at around 4%, compared to 6% in outer London, according to CBRE. In addition, the lack of available stock has prompted investors to change tack and to start developing to rent or to forward purchase from developers in a bid to access residential stock, according to Lacey at CBRE. In addition to London, investors are also targeting key cities such as Manchester, Birmingham and Leeds.

The UK’s chronic housing shortage is also likely to fuel investor interest due to the potential growth of the market, according to Lacey. ‘We’re still a long way off the residential volumes in the US but the potential for growth in the residential sector in the UK is compelling to investors,’ he said.