Institutions poised to move into residential sector

Home ownership in Britain is moving towards the European model, according to new research by global real estate consultancy CB Richard Ellis.

Jon Matthews, director and head of the residential valuation team at the firm’s Birmingham office, says that the dynamics have shifted towards renting rather than home ownership.

He said: “An Englishman’s home may still be his castle, but these days it’s rented rather than owned.

“We are seeing a seismic shift in the way residential property is held, as a result of the recession, the difficulty of obtaining mortgage funding and the scarcity of new homes. More and more people are now putting off buying until later in life, much as they do in France, Italy and Germany.”

According to CBRE’s snapshot*, Britain’s private rental sector has grown by more than 1,000,000 households in the past decade. This trend is also gaining momentum, with two-thirds of all households created in 2008/09 in the private rented sector. As a result, the industry is now worth a staggering £500 billion, dwarfing the value of the commercial sector.

Despite the downturn and falling house prices, the average cost of a home to income ratio remains uncomfortable for many. Furthermore, with average first-time buyer deposits currently at £33,000, the entry costs to home ownership are prohibitively high. As well as underlying affordability issues, continuing population growth means that the rental market is set to grow.

As a result, Mr Matthews anticipates that institutions will start to become active in the private rented sector.

He said: “This is welcome news all round.

“Firstly, it means there will be an alternative source of finance. At present, funding for development is scarce and, where available, expensive. Off-plan sales have also become a thing of the past for all but the best schemes, which means that many banks and developers need a secure exit route. Institutions could provide the vital kick-start the housing sector needs.

“Secondly, the presence of institutions within the private rented sector will bring about a much needed professional management approach. While the quality of rental stock has improved on the back of the buy-to-let investment market, the quality of management varies widely. Institutions are focussed on income returns through rents, and the biggest risk to that is void periods. To prevent voids you need to ensure your tenants are happy, which is done through proactive management.”

Although institutions are active in the US residential market, the UK industry has not matured. However, Mr Matthews believes the conditions are now right.

To begin with, the returns from UK residential property are now in line with other assets. According to the Investment Property Databank (IPD), the five- year average total return of 6.8 per cent is ahead of equities (6.5 per cent), commercial property (1.8 per cent) and bonds (5.5 per cent).

What’s more, investors are keen to spread their property exposure and risk profile.

There are, however, some hurdles.

Mr Matthews said: “To operate efficiently, the institutions need critical mass. They don’t want a handful of units dotted around a development – they want 100 per cent ownership to generate procurement and operating cost savings.

“This can provide the potential to provide a superior product for tenants, including function rooms, fitness facilities, swimming pools etc. This helps with marketing and tenant retention, thus avoiding those void periods.

“Because this investment market is immature, the lack of market data also makes it more risky. Planning instability is also a barrier to entry – though the new Government is conscious of this and it is hoped they will address it in order to improve housing volumes.”

Despite these barriers, Mr Matthews is confident that it is only a matter of time before institutions make a move on the residential sector.

He said: “Although economic conditions have conspired against home ownership, for a growing number renting is often borne out of choice, rather than necessity. Young professionals, for example, may wish to remain footloose so they can move up the career ladder more readily.

“The growth of the buy-to-let investment market has increased the stock of good quality properties available for rent and has also improved choice. As a result, the historic stigma associated with renting has now been removed.

“The private rented sector is most prevalent in London, because of the obvious affordability issues. However, the rest of the UK is playing catch-up.

“What’s more, population growth continues apace – by ten million people over the next 25 years.

“All these factors are whetting investor appetites. This will feed through to actual transactions soon. It’s no longer a question of if, but when…”

* CBRE’s “The UK Private Rented Sector” is available at www.cbre.co.uk

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