INVESTMENT BRIEFING: Tight supply gives resi a boost

Institutional investors are set to inject up to £9 bn (€10.9 bn) in UK residential as the private rental sector continues to expand, according to Jenny Siebrits, head of residential research at CBRE.

Speaking during PropertyEU’s European Residential Investment Briefing held in London on Tuesday, Siebrits said the UK rental market was undergoing a major transformation. ‘The private rental sector has not traditionally been considered the tenure of choice in the UK. But one of the legacies of the credit crunch has been a shift in tenure preferences.’

Until the outbreak of the global financial crisis in 2008, the UK residential market was characterised by a fairly high and rising level of owner occupiers, Siebrits pointed out. ‘At the peak, the percentage of owner-occupiers was around 70% compared with 40% in Germany. But there has been a shift away from owner-occupied to the private rental sector for two key reasons: the wider economic downturn and the lack of financial availability. We estimate that around 1 million first time buyers have been unable to get a foot on the housing ladder. They have needed to look for alternative housing solutions.’

One of the key factors spurring development in the sector is the scarcity of stock, Siebrits said. Student housing is also thin while student numbers, particularly in London, are expected to grow further in the coming years, she added. ‘There’s a lot of overcrowding, in some places students are packed like sardines. That’s why so many are staying with their parents.’

Lack of suitable housing stock is set to remain an issue for some time, noted Mark Collins, executive director chairman of residential CBRE. More product may be coming to the market in the next couple of years, but the government’s target of 42,000 new housing units a year is unrealistic, he told the Briefing. ‘We’ll be struggling to get 20,000, it’s more likely to be about 16,000. And research shows that the UK needs as much as 52,000 new units. That’s a huge gap and the stock is not available. Those drivers will continue.’

As tenure preferences have shifted, the private rental sector has seen the number of households grow by one million over the past five years to just under four million households. At present, however, the rental market is very fragmented with roughly 75% of the stock owned by Buy-to-Let investors. Of this figure, the bulk – or 73% - of Buy-to-Let portfolios comprise fewer than 10 properties, Siebrits noted. ‘The fragmented nature of the market makes it very hard for institutional investment to access suitable product.’

In the past, institutional investors were put off by the poor stock and the lack of professional management and expertise in the sector. But change is in the air. The private rental sector is getting huge support from the government and demand for institutional product is growing, Siebrits pointed out. ‘There has been a change in attitudes, particularly among young professionals. They want somewhere nice to live and are really demanding a better product. In the past, the private rental sector was the naughty middle child of the housing market, but quite frankly the parents are now fed up and are doing something about it.’