TheComment
Jon Neale is a director of residential research at Jones Lang LaSalle
Institutional investors – the white
knights of the housing market? Perhaps they could free up the housing market, suggests Jon Neale.
L
ast month Sir Adrian Montague published his report into the barriers to institutional investment
in the private rented sector. In many countries, such as Germany and the US, pension funds happily invest in building apartment blocks, which they let and hold for the long-term. In the US it is a thriving industry; more stock was traded between funds over the past year than in the retail and industrial parts of the American commercial property market. The Government desperately
wants to see more homes built, but developers’ have no intention of increasing production in the medium term – for the simple reason that they see no upturn in the mortgage market. Why would they build homes that no-one could get a loan to buy? There have been initiatives
such as NewBuy Guarantee, aimed at helping unlock finance for new build homes, but their success has been limited. There are hopes that pension funds could stimulate construction, an important part of the economy, if their financial firepower were diverted into the housing market. Moreover, with more families with children in privately rented accommodation let on six or 12 month leases, it is possible that institutions, with an eye on longterm income streams, could be more inclined to offer longer stable tenancies. Pension funds have not always been absent from the British housing market. It might surprise some people that, until the 1960s,
18 l October 2012 l TheNegotiator
a large chunk of the population rented their homes from such institutions. But a combination of rent controls and other
regulations forced them to sell almost all of their stock. Given the dizzying increase in house prices since the late 1990s – and the more recent increases in rents – it is surprising that the funds still avoid the sector. Given the evident demand for rental accommodation from those young people unable to access
There is also a belief that there is a lack of appropriate management for the stock, and this will lead to some reputational risk for an investor. Of particular worry to many Fund Managers is the poor publicity if they are forced to evict a young family or an elderly person. There are also practical issues.
How do you go about procuring a portfolio of the size – say at least £50m – that would interest big investors? The British
“How do you go about procuring a £50m portfolio?”
the mortgage market – demand that is unlikely to go away in the foreseeable future – it seems an appropriate time for them to invest in the sector once again. They are deterred by several
factors. First and foremost, the yields, particularly in areas where the economy looks most robust, are very low, especially once 40 per cent has been deducted for management costs. Some believe this could be reduced by building custom blocks that could be managed more efficiency, but it would still look poor in comparison to commercial property. Most of the ‘return’ for landlords has been driven by capital gains – that’s house price increases to you and me – which they believe are inherently cyclical.
housing market is fragmented, with most investment properties owned by single-property landlords. Only developing units would produce the lot sizes required, but this is a risky and complex business. Montague recommends that
council planners make provision for rented homes to be provided as part of new developments and that some excess public land be used to stimulate the market. There could be some scope for seeding or other incentives; there is plenty of evidence that institutions are keen to invest, but do not want to be the first mover.
The Government could step in,
on the same terms as any other investor, and encourage others to follow, before selling its stake.
The report also recommends a task force to help councils work with stalled sites; Montague believes that the private rented sector could unlock projects that have seized up because the would-be buyers are unable to obtain mortgages. It will be interesting to see how
the Government responds to the report, and whether it puts in place any of the measures suggested. The Treasury has previously said that it does not believe institutional investment can be achieved on any scale without tax breaks, which it is not prepared to consider during a time of austerity. Meanwhile, politicians are very aware that the vast majority of people aspire to homeownership and do not want to be seen to be favouring landlords, even if they are pension funds or other institutions. There is already some
institutional interest in residential property, if only in London and the South East – albeit from foreign investors looking at the existing stock. For many, the second-hand market, particularly in established centres, may look like a better bet than the untested area of custom built-to-let property. My belief is that institutions
will begin to make more of a mark on the market, but it will be on a small scale and confined to a few areas, mainly in London and the South East. The majority of residential investment will still be carried out by private individuals, often with portfolios of just one or two properties.
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