The burgeoning rental market
In addition to innovative solutions to the management hurdle, other changes have made the sector more appealing to investors. Perhaps the most obvious reason for the new-found interest in the asset class is the huge growth of the private rental market, spurred on by drying up of lending to first time buyers.
The proportion of owner-occupier households in England has fallen from 70% in 2001 to 66% in 2011, the lowest level since the late 1980s, while the proportion of private renters has risen from 10% to 16.5% over the same period. Some 3.6m people in England now live in private rented accommodation and that number is set to rise significantly over the next few years.
“I’m in my early 50s, and was able to come to London in the early ‘80s and buy a house with a friend and get quite a big mortgage,” says Thornton. “That’s gone. The average age of somebody getting a mortgage as a first time buyer, unassisted by parents, is now 37 and I think with the banking conditions as they are, that’s going to continue – certainly for the next five years.”
With renting on the rise – particularly in London – the government is looking for ways to build more homes, and as with its infrastructure plans, hopes institutional investors can supply the funds necessary. In a bid to house this growing army of private tenants, the government last year commissioned Sir Adrian Montague to look at ways of increase housing stock. Published in August 2012, his report recommended that institutional investors could fund large-scale building of private housing specifically for rent. The findings were broadly welcomed, with the British Property Federation saying the recommendations “could unleash unprecedented investment in house building from pension funds, insurance companies and REITs [real estate investment trusts]”. “Encouraging institutions into building homes for rent has for some time been seen as the holy grail in enabling a long-term, private rented sector which is designed and built to let and offers renters something a bit different in the marketplace,” said chief executive Liz Peace.
Meanwhile, changes to the way stamp duty is calculated on housing blocks has made it far more investor-friendly. “Previously if you bought a £20m property you would have paid 4% stamp duty on £20m,” says Thornton. “Under the new rules you now divide the £20m by the number of units and take the average unit size and pay the stamp duty on that, which is much friendlier.”
A ‘chicken and egg’ situation
However, while many of these stumbling blocks have been eliminated, one of the biggest barriers to institutional investment is a lack of suitable housing stock. Purpose-built apartment blocks simply don’t exist in the way they do in the US and mainland Europe, leaving new-builds as the only realistic option. And therein lies the rub: investors are only interested in new-build apartment blocks, but without investment not enough new-build apartment blocks can be built. “That’s always been the problem,” Harding explains. “You’re not going to get the stock until investors start investing. But you’re not going to get the investors until you get the stock.”
Jones agrees: “I think there are opportunities, but it probably is a little bit ‘chicken and egg’. I guess our hope is that transactions like [Halo] can be a guide as to how this can be done and how that investment can be brought into the sector.”
So while much has been done to open the door to institutional investors, there is still some way to go before residential property commands the allocations its commercial counterpart enjoys. Investors, however, remain optimistic. “There is strong appetite from pension funds; it just needs to be done in a framework that they’re comfortable with,” says Jones. “That’s what this transaction has tried to achieve, while hopefully making a positive contribution to the delivery of more housing in London and the UK.”
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