UK - The institutional residential property sector will in future resemble student accommodation model as pioneered by operator-fund manager UNITE, according to Grainger senior management.

Nick Jopling, executive property director at Grainger, pointed to the growing body of London-based "in-betweenies" - graduates unable to afford mortgages - as the target tenants of assets for the firm's recently launched build-to-let fund with developer Bouygues. Grainger's focus to date has been on letting low-income housing in the UK mainly to elderly people.

Andrew Cunningham, CEO at Grainger, said the new-look residential assets would need to appeal to this section of the population and so would be comparable to UNITE's student accommodation assets but with higher specifications in some areas. "The bathrooms will be better than UNITE's, and won't be made of fiberglass," he quipped.

Asked whether UNITE would consider expanding into the non-student residential sector, given apparent demographic shifts, a spokesman for UNITE declined to comment but said in an email: "We're delighted to be the benchmark for Grainger's new build-to-let venture - and remain immensely proud of our bathrooms."

Cunningham claimed rented residential could make up 30% of the London market within five years following a structural shift towards renting over the past three years.

"More professional landlords are getting better returns. That presents a vast opportunity for the development of the private rental sector," he said.

Despite a portfolio 62% located in the South East and 50% in London, he said Grainger had deliberately avoided upmarket areas in the capital because "spectacular" price increases were not justified by fundamentals. He compared investing in prime London residential to investing in precious metals.
"There's a commodity price element because of the supply demand imbalance that has little to do with the underlying asset," he said.

"We've seen extraordinary numbers at the very, very high end, but they're as representative of the market as a one-room hovel in East Scotland. We're not overexposed to either."

At the same time, he said the firm had effectively exited regional markets with negative economic growth prospects, including Wales and "large chunks of Scotland".

The preliminary full year results announced yesterday revealed disposals of UK assets worth £41m over the past year. Cunningham told analysts there had been "an element of portfolio cleansing", primarily based on geography or because of poor transport links, upcoming expenses or bad tenants.

Location also accounted for disposals of German assets worth €23m from a portfolio of 40,000 units, with further disposals valued at €30m planned for next year.

Announcing pre-tax profit of £26.1bn (€30.2bn), Cunningham said the business generated £81.1m from sales, £62.4m from rents, and £8m from third-party fees - a tripartite model said enabled it to spread risk. 

However, he forecast significant growth in the fee-based business following recent deals to manage a 1,500-unit distressed Lloyds portfolio and Aldershot barracks for army housing contractor the Defence Infrastructure Organisation.