To-let housing was formerly the territory of small, individual investors. But larger companies are drawn to it, due in part to the growing rental sector.
The Homes & Communities Agency launched a programme in May 2009 to encourage larger investors to provide funding for a portion of the housing sector, specifically that of large-scale, market-rate rental housing. Called the Private Rental Sector Initiative (PRSI), it has been successful at attracting some insurance companies and pension funds to this form of real asset investing, providing the income flow that those kinds of investors seek.
Historically, to-let homes were the investment preferred by individuals and small companies, to whom the capital growth was the primary objective of the investment. These smaller-scale investors often absorbed operational expenses associated with market-rate rentals, whereas pension funds and other institutional investors need to generate returns that help them meet their liabilities. For them, commercial property was the more attractive draw.
But a 2014 report from Jones Lang LaSalle (JLL) shows that PRSI, otherwise known as the “build-to-let” programme, has successfully drawn £5 billion into the private rented communities sector. JLL’s head of residential investment commented on “a significant wall of money seeking UK residential assets,” and that this indicates that “wall” is in fact building walls, roofs and floors in the high-demand housing markets of the UK, inside and outside of London – including in Edinburgh and Manchester.
Why is this model succeeding now? High demand for rental properties at market rates, not social housing, is an emerging factor. A larger portion of households rent instead of owning today than before the financial crisis of 2008. Part of the PRSI initiative is in how it encourages municipalities to sell publicly owned lands for this investment, and to expedite planning procedures for getting these built.
But there remain challenges that dissuade some institutional investors. One is that the data and metrics typically employed in the commercial property sector are lacking in residential rentals. JLL also suggests rebranding this type of housing as “private rented communities,” to provide emphasis on the tenant-centric approach. The funding models too might be altered to attract long-term institutional investment money to what is still considered more risky development. “It’s innovation and friendlier planning processes”, says JLL, “which brings forward more money.”
Still, larger and individual investors see strong prospects in residential development because of the continued shortage of housing that fails to meet population growth in the UK. With shifting centres of population attracted to new employers the homes that exist are not necessarily where the jobs are. Real asset portfolio investing continues to identify UK land that can be strategically purchased, achieve planning change approvals and be developed for sale to new homeowners.
Investors looking at any part of the residential development sector need to consult with an independent financial advisor who can sort through the various options in light of the investor’s own wealth development plans.