The private rented sector could prove to be the answer to pension schemes’ prayers, but they should start investing now to claim the greatest rewards, writes Emma Cusworth.
Despite the average Brit being familiar with the residential property market, UK pension funds have yet to make meaningful allocations to the sector. Long memories of rent controls in the 1970s and a lack of existing suitable private rental properties have deterred institutional investors, but as access increases and the asset class enjoys significant tailwinds, the UK institutional residential market is likely to expand significantly. Like all new opportunities, the early bird catches the worm.
The total UK residential market is worth around £4trn and around 25% of that, or £1trn, is the private rented sector (PRS). So far, only about 5% of the PRS is represented by institutional investors (and some experts believe the true figure is lower still, at around 2%-3%).
“The lack of investment in an obvious asset class is surprising,” says Richard Greening, chair of Islington Council Pension Fund.
“Islington is currently suffering from lots of private property being sold in Hong Kong as an investment asset. The question then is why pension funds are not benefiting from and producing properties to offer tenants.”
AN IMMATURE MARKET
The UK is some distance behind its European and US counterparts in terms of the level of institutional ownership of residential real estate.
“Even if the number of institutional assets in the space doubled it would still be tiny versus European and US markets,” says Alex Greaves, head of residential investment at M&G Real Estate.
According to Andrew Hills, director, client portfolio management, at Invesco Real Estate, the UK private residential market is in a similar position to the US in the 80s, but today around 30% of the US market is under institutional ownership.
“The US market has had open-ended residential funds for a lot longer and the benchmark allocation to residential is up to around 30% of a real estate allocation,” Hills says. “In time the same will happen here.”
In fact, as the UK private residential sector has become more accessible to institutions, international investors with more experience, including those from Australia, Canada and Holland have been quick to take advantage of an asset class showing strong return potential, inflation protection and good diversification characteristics.
Paul Jayasingha, senior investment consultant, manager research at Willis Towers Watson, says: “UK institutions should be taking some comfort from overseas investors and there is likely to be a first mover advantage in PRS.”
RETURN PROFILE
The Islington Council Pension Fund, which has over £1bn in AUM, is among those early movers in the UK and, based on the 2014/15 annual report, invests around 2% of their 15% real estate allocation in a residential housing fund that aims to outperform the UK House Price Index by 3.75% net income.
Islington’s Greening says: “Returns have been good at roughly 8% or more and offer a combination of income and increasing capital value.”
