Purpose-Built Large-Scale Properties Coming to Britain

A new type of renting is arriving in the UK. Purpose-built, large-scale properties that offer long-term tenancies, stable rents, and shared services are coming to Britain.

This is a practice called professionalised private rental sector, in which large institutional investors are entering a market that has previously been led by buy-to-let landlords.

Attracted to growing urban populations, and stable, long-term yields, and pension funds, investors are either buying up lumps of existing rental property, or embarking on built to rent, a trend famous in the USA, Canada, and parts of Europe.

The development of this practise in the UK could provide tenants with an alternative to typical landlords. Investors may also be able to buy into the sector without having to buy a property themselves.

Institutions are making substantial investments, especially in London and the South East. The cost of rental property deals for large-scale investment grew from £1.6bn in 2012 to £2.5bn last year, says Savills.¹

Director of Residential Research at Savills, Jacqui Daly, says: “It is happening in a bigger way.”1

One of the biggest build to rent developments is 1,439 homes in the previous Olympic Village in Stratford, east London.

The developer, Delancey, is paired up with Qatari Diar, the property sector of the Qatari sovereign wealth fund. The apartments will be let on three-year tenancy agreements, and will require no management or agents’ fees.

Purpose-Built Large-Scale Properties Coming to Britain

In other parts, M&G Investments have purchased 534 properties to rent, from Berkeley Group in a deal worth £105m. The homes are primarily one or two bedroom flats in 13 different areas. The group also bought 301 rental properties at the Stratford Halo development, and 233 homes at East India Dock.

Institutions prefer these ready-made blocks of rental properties, as they dodge any upfront costs and the risks linked to planning and construction. However, at this scale, they are hard to come by.

M&G Residential Fund Manager, Alex Greaves, says: “If we have the opportunity, we’d like to buy another one, but the reality is they don’t come up that often. And if you can’t buy it, you have to build it.”1

Many investments have arrived from overseas, where the practise of large-scale managed rental properties is commonplace.

Essential Living is a UK specialist in these developments, but is backed by M3 Capital Partners, who is funded by US pension schemes. Fizzy Living is a sector of the Thames Valley Housing Association, and is financed by Macquarie Capital, an Australian investor.

Andrew Allen, Head of Global Property Research at Aberdeen Asset Management, says: “Investors are increasingly aware of this market. It feels like there’s momentum in it.”1

There are certain influences behind the increase in investment. There is still a short supply of housing in Britain, despite the huge demand, which has kept prices high.

First time buyers are still struggling to break into the market, as average earnings are stable against rising house prices, mortgage lenders are demanding high deposits, and monthly repayments are higher, due to the lack of low cost products, such as interest-only mortgages.

Research has found that generation rent is growing and growing. Over half of under 35s in low-to-middle income households currently live in rental accommodation, a huge rise from just over a quarter in 2003-4, says Resolution Foundation.1

Quality in rental accommodation, however, is often poor. Savills found in 2012 that a quarter of tenants left their last rental home because of poor management.1

These circumstances have led big investors to the large-scale rental industry. However, Vidhya Alakeson, Deputy Chief Executive at Resolution Foundation, says that these efforts of bringing big money into the sector has been going on for years.

She says: “The number of actual deals going through is very limited. It’s going to be a slow burn.”

She believes that the mindset of institutions needs to be changed: “Built to rent falls between two stools. It doesn’t have the low return but highly secure nature of social housing investments, but nor does it have the high returns that equity investors typically look for. Traditional property investors don’t quite know where to put it.”1

Institutional investors find matching their long-term liabilities to a steady income appealing. A study by Resolution Foundation found a total return on an estimated rental property portfolio of 7.2% per year over a decade.1

To kick-start the market, the Government have created measures to push build to rent. These include: a £1bn equity fund to generate development; £10bn of loan guarantees for the social and private rental sector; new draft planning guidance on built to rent projects; and a Whitehall task to oversee the fund and loan guarantees.1

Daly says that the loan guarantees will promote confidence in the sector. She says: “The guarantee could have a huge impact on how quickly the market matures. It will help to improve the returns.”¹

¹ http://www.landlordexpert.co.uk/2014/05/12/rent-the-next-big-asset-class-2/