Rising demand coupled with limited stock will continue to bolster the private rental sector across the UK and Europe
Rising demand coupled with limited stock will continue to bolster the private rental sector across the UK and Europe
Institutional investors are set to inject up to £9 bn (€10.9 bn) in UK residential property 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 one million first-time buyers have been unable to get a foot on the housing ladder. They have needed to look for alternative housing solutions.’
_________________
Click here to read the full article.
_________________
Student housing
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 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 stock is set to remain an issue for some time, noted Mark Collins, executive director and chairman of residential at 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 many 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 investors to access suitable product.’
Institutional demand
In the past, institutional investors were put off by the poor stock and 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.’ London has the strongest potential for capital appreciation, particularly locations near the new Crossrail link, Collins said. The impact that Crossrail will have in terms of cutting travel time between now and 2019 is still a bit of a secret, he added. That, in turn, will have an impacton house prices: he is predicting increases of up to 40% in some locations along the route such as Maidenhead where travel times will roughly halve. ‘Crossrail will influence where people live and work. It’s an interesting time.’
Forward funding
While the UK market continues to grow and expand, Invesco Real Estate is also turning to mainland Europe, John German, director of residential investment at the company, reported. In October last year, the investment manager announced it had acquired a residential development in Frankfurt for around €62 mln, marking its first deal in the segment in Europe. The acquisition of the 21-storey Westside Tower takes the form of a forward purchase and was made on behalf of a club of German institutional investors. The club has an initial target volume of €250 mln to invest in the residential sector. The deal, revolving around a forward-funded development on behalf of domestic investors in a special fund and a €60 mln lot size, is also based on alignment of interest, German said. ‘We like that as a model.’ Invesco’s focus on the European residential market follows investor demand, German said. ‘Our German initiative comes off the back of our investors who said we like you as a manager and we like resi. That’s the first driver. There are various markets where the fundamentals are good: the Nordics, for example, also have very interesting dynamics. There are supply-demand imbalances in a number of countries and opportunities for different styles for different investors.’ Residential appeals not only to German and UK institutional investors looking for fixed-income products; it is also clearly on the radar of opportunistic US investors, German said. ‘There’s a broad spectrum of institutional investors looking at different markets.’ The gravitation of European institutional capital and private equity towards the residential sector is linked to its strong performance across Europe compared to other asset classes, noted Mark Weedon, head of UK alternative real estate at IPD. ‘In the past 12 years, the sector has generated total returns of 10% a year. The UK sample includes very prime Central London, but even excluding central London, the UK yielded 9.1% over the 12-year period.’ Capital appreciation has been a key component of the high UK yields, Weedon said. By contrast, Germany, Switzerland and the Netherlands have generated income returns of 5-6% over the period with very flat capital performance.
Low risk
Broadly speaking, residential property generates an attractive outlook at a low risk, said Marcus Cieleback, group head of research at Patrizia Immobilien. ‘It has a different risk profile. The risk of losing cash flow for multi-family in decent locations is smaller than for other assets. But in some markets it is quite hard to find the stock.’ At the same time, investors are adapting and seeking ways to add value, for example by buying land and financing development, he added. ‘That will bring a more diverse structure to the residential market, just like offices.’
Diversification scope
Nevertheless, pressure from the demand side will continue to support the rental sector, he predicted. ‘We’re seeing 1% new build per year at most; that’s not a big shift. We’ll have to make do with existing stock – that’s it.’ Moreover, the owner-occupier market remains difficult to access for many first-time buyers, he added. ‘It’s much harder to get a mortgage today than 10 years ago.’ The scarcity of private rented stock in many countries limits investors’ diversification to residential, Cieleback noted. ‘The residential sector is re-merging in the UK and changing in a lot of countries like the Netherlands, Sweden, Spain√ and Portugal due to government activities. It will be an interesting time in the next three-four years’.
Top investment picks
Asked how they would invest a theoretical €500 mln, the panellists made the following choices: Marcus Cieleback (Patrizia Immobilien) would look at Germany, Ireland – in particular Dublin – and Denmark. ‘Finland is also attractive, but it’s very small.’ Spain – in particular Madrid and Barcelona – are also on his radar, but not holiday developments on the coast or city fringes. In the medium term, some CEE markets also offer potential, in particular Poland. ‘Affordable housing is needed in all metropolitan areas. If you stick to these areas, there are opportunities.’ Mark Collins (CBRE) sees opportunities arising along the Crossrail route in London, Southbank, Battersea and eastwards to Canary Wharf. John German (Invesco) believes demographics are key for formulating a credible strategy in Germany. In the UK, he sees potential outside London in larger regional conurbations such as Bristol, Birmingham, Leeds, Manchester, Edinburgh and Glasgow. Mark Weedon (IPD) believes investors are most focused on the big transport hubs, centered in or around London. That does not necessarily mean prime, he said. ‘Investors will go to areas where they are most confident about employment and growth.’
by Judi Seebus