RESIDENTIAL
GILTS
prime central London and PRS returns. So gross yields are around 4% in prime markets such as the City of Westminster and Kensington & Chelsea, increasing to 5% in Wandsworth, 5.5% in Brent, 6% in Redbridge and exceeding 7% in Barking and Dagenham. “We view prime central London
residential as being overpriced but consider that healthy, more sustainable returns are available outside of the core markets,” says PRUPIM spokeswoman Emma Harding, expressing a view echoed by many within the industry. “It’s Zone 2 and further out that deliver the best opportunities. Here you can give customers what they want – good accommodation, service, transport connections and affordable rents,” according to Chris Lacey, head of residential investment at CBRE. As a result of an increasing population,
shortage of stock and constrained mortgages, Peter Allen of Savills says that London rents have “grown strongly by an average of 5% per annum over the last five years”. He forecasts that the 27% of the capital’s households that rent privately will increase to 34% within three years.
HOW IT IS OVERSEAS
The first steps being taken in the UK’s institutional PRS present a stark contrast with the US, where the so-called “multi-family” real estate investment trust sector is booming, according to a report by Jones Lang LaSalle. There are now over 10 funds active
across the country, including the largest, Equity Residential, which operates 550 apartment communities. Another major player is Aimco, which operates across 36 states and has around 250,000 residents in 520 blocks. There are also well-developed apartment REIT markets in Australia and Singapore.
PRS RETURNS AGAINST OTHER INVESTMENTS
PRS 6.1%
Source: IPD There is also a growing realisation that
in an era of uncertain returns in many investment sectors, residential property has not only a strong rental yield but capital appreciation. “Because of the communal obligation,
incentive and will of occupiers and landlords to maintain and refurbish over a prolonged period, the [residential] assets will appreciate. In the commercial market, the
underlying assets tend to depreciate over time with the value carried by the lease and redevelopment value by the end of the term,” says James Mannix of Knight Frank’s residential investment team. All of this leads, almost inevitably, to
the three words that have promised so much but delivered so little in the UK in recent years: build-to-let. Industry observers believe the arrival of institutions as investors means they will soon become developers. The government’s £200m Build to Rent
scheme, announced late in 2012 and managed by the Homes and Communities Agency, aims to encourage this trend. It claims to minimise risk for
developers by funding construction of properties for the PRS until they are let and managed. However, it was
oversubscribed within a few weeks of its introduction. Many have seen this as a sign that funds should now step in. “We have a government that cannot or will not create stock directly and an owner-occupied sector that’s faced unprecedented credit constraints, limiting the traditional housebuilder response [to build homes to let]. That leaves a gap and the most viable response could come from institutions,” says Einar Roberts of Cluttons. Such institutional initiatives could
come in phases. An interim stage may be that “investors will pre-purchase consented sites for blocks of flats and enable funding and development”, according to Knight Frank’s Mannix, ahead of “ultimately developing themselves”. He says Build To Rent, when it arrives,
will prosper first in outer London rather than PCL. If so, it may reverse the fortunes of builders in the outer boroughs, where starts in 2012 were down by 21% on the previous year, according to Estates Gazette’s London residential research. So, in theory, builders will win, stock
supply will improve and funds will have a new investment channel. This time, the dawn may not be false.
3.7%
ALL-COMMERCIAL PROPERTY
3.5% 1.5% EQUITIES
CHANGING THE GAME FOR STRATFORD Talk to our London game changers at:
realestateforachangingworld.co.uk
8 June 2013
www.estatesgazette.com 35
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