in the second quarter of this year. Yet the shares, around 88p, are trading only half their net asset value, a long way below the £7 level they hit before the housing crisis. It’s interesting that though the
commercial property market hasn’t enjoyed the same rental growth as residential, and though there is more office and retail supply about to hit the market, the commercial property stocks seem to be so much more highly valued than the residential. Why the residential stocks should sell for half their asset value while the commercial ones sell in many cases at a slight premium is difficult to work out. It’s a pity then that there aren’t any other
quoted residential property shares. But things might be changing. First of all, the trend towards home ownership of the 1980s and 1990s has swung back the other way. The Genesis Housing Association reports a drop in home ownership from 70.9 per cent to 67.4 per cent of households over the period from 2003 to 2010; if this trend continues, there will be 1.9m fewer owner occupiers by 2025, putting one in four households in the PRS. Secondly, a number of fairly technical
changes to stamp duty and REIT rules have made it easier to create a residential REIT, though the final details won’t be ready till later this year. Stamp duty paid on the aggregate price of properties bought has always made it prohibitively expensive to acquire large residential portfolios; now, stamp duty will be charged on the average price per property instead. Changes to the ownership rules will also allow pension and investment funds to take substantial stakes, which isn’t now the case. Alan Collett, Chairman of ARIM, says, “I think you will find in the next year that there is significant interest in residential REITs.” A residential REIT could be an attractive
way for housebuilders to package up unsold stock, holding properties for rental. That could change the whole way the housebuilding market operates, if it became popular – and it seems more likely that this will happen as a response to having unsold inventory, rather than as a deliberate build-to-let scheme. Accountant KPMG has researched the
background to REITs and believes they could also be attractive solutions for banks with a large number of repossessed properties (whether from individuals, or from housebuilders or developers), which could be spun off into a REIT. It’s a more attractive proposition than reducing the price in order to sell them off. Housing associations might also be interested –
42 DECEMBER 2011 PROPERTYdrum
London & Stamford has taken a chunk of the
Highbury development among other deals in the last two years.
potentially entering into joint ventures or using REITs to raise fresh finance for the sector. Alan Collett believes the first REITs may well come from RSLs who want to expand further into affordable-rent properties, and need finance. He points out, too, that RSLs possess the only truly sizable residential portfolios in the UK, and suggests Places for People as a likely early mover. However, the past history of residential
funds suggests we’re still a long way from having a functioning residential REIT market. A number of insurance companies including Aviva, Legal & General and Aegon have looked at the possibility of establishing residential funds, and were unable to attract enough interest. In most cases, they were not considering build-to- let, but aiming to ‘seed’ the funds with an existing portfolio brought to them by a housebuilder or housing association.
diversification of soMe coMMerciaL reits Two of the major commercial REITs, though, seem to think that there’s an opportunity in the residential sector. London & Stamford has started buying up residential developments – it’s able to get good prices owing to the funding problems facing many developers. Patrick Vaughan, L&S’s CEO, has said he
wants to build the residential portfolio up to £300m in value – it’s currently worth just £89m, so there is a way to go, though compared to the firm’s £1.5 bn portfolio of commercial property it’s still small beer. So far, in two years the company has done
three major deals – 146 flats at Highbury, 57 in Bridges Wharf, Battersea, and 74 at the Oval. British Land has also been moving into
housing schemes with the purchase of Wardrobe Court in the City of London. The lease on these serviced apartments runs out in 2014, and no doubt British Land will be able to re-let at significantly higher rates. Whether either of these companies really
Aviva looked at establishing a
residential fund but were unable to attract interest.’
wants to become a big player in residential property remains to be seen. L&S may well just be an opportunist, spotting the chance to make an exceptional profit, and British Land does seem to be in the mood for ‘let a thousand flowers bloom’. But if either of these projects comes to
full fruition, there could be a whole new area of investment on the UK stock market – and potentially an interesting way to raise fresh funds for housebuilding.
Do you have any views to share?
www.propertydrum.com/articles/REITSdec
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