x Abu Dhabi, UAEFriday 19 January 2018

Institutional investors set to step up to the plate for London's residents

This year is predicted to be the year institutional investors finally commit to providing homes for renters in the United Kingdom.

This year is predicted to be the year institutional investors finally commit to providing homes for renters in the United Kingdom.

Jones Lang LaSalle, a property consultancy, says more than £2.85 billion (Dh15.92bn) is being targeted at the private rented sector from UK and overseas client funds.

The money is coming from existing UK investors, from overseas funds, private wealth and private equity; as well as so-called housing associations - which are charitable and local government-funded providers of homes.

The figure of £2.85bn compares to £1bn aimed at the sector last year and represents a 185 per cent increase of capital. "We said at the start of this year that 2013 would be the year that the theory that institutions could invest in the private rental sector would turn into reality," says Adam Challis, the head of residential research at Jones Lang LaSalle.

He said the appetite for investment in the UK residential sector has been growing for five years but now there was demonstrable support from housebuilders.

"One of the big challenges is that there hasn't been the right sort of assets to acquire. Now there won't be a large development in London or the south east that doesn't incorporate a build-to-let element," Mr Challis says.

The first institution to take the plunge was M&G Investments, an arm of the insurance giant Prudential. At the turn of the year, it paid a housing association, Genesis, £125 million for a 160-year lease of 401 market-rented flats in a block known as Halo, in Stratford, next to the Olympic stadium in East London. The block is due to be completed this year.

A second landmark deal, by the same institution, was announced at the beginning of April. M&G Real Estate is paying £105m to buy a residential portfolio of 534 homes in Greater London and the south east, from Berkeley Group, a housebuilder.

Berkeley will remain a minority stakeholder when the deal is completed.

"The expanding residential rental property market, particularly in London and southern England, is gaining in appeal for institutional investors," says Alex Jeffrey, the chief executive of M&G Real Estate.

"We believe returns from the sector - which have historically outpaced commercial real estate - will continue to be attractive as demand increases."

"For institutional investors, the challenge of the residential rental sector has been two-fold: can you acquire property in sufficient scale and how will you ensure the units are managed to a high standard? This deal meets both aspects of that challenge."

M&G Real Estate's move has been hailed as a sea-change in the country's housing market. Aviva, another UK insurance giant, is thought to be on M&G's heels with a similar deal, which would involve it buying thousands of homes in London and the south east from a housing association called A2Dominion.

Other institutional investors understood to be looking at the sector include Legal & General and Schroders.

The catalyst for institutions to get into the rental sector is not just sentiment.

Residential property has consistently outperformed nearly all other areas of the market in the past three decades, on both a total return and risk-adjusted return basis.

It has also outperformed the equity and gilt markets over the 30-year period.

In real terms, the difference between residential and commercial property is even starker, with residential having produced an annual total return of 9.7 per cent, compared with commercial's 5 per cent, according to data from M&G Real Estate.

"The UK institutions are struggling to get the returns they need from the bond market," says James Mannix, the head of residential capital markets at Knight Frank, a property surveying firm. "They have a huge amount of money to invest somewhere and the residential market is massive. The income is also very secure although it does not have long leases or tenants with covenants."

The institutions' own investors are also clamouring for them to be investing in residential, having seen the sort of returns that can be made.

"They are recruiting people and getting their resources together. It is definitely happening but the number of deals done are thin on the ground and we expect to see more at the end of the year," Mr Mannix says.

The stage is set, it now just remains to be seen if these most cautious of investors will take the plunge.