RETURN TARGETS
It is the duty of all professional investors to inform their clients that past performance is not a guide for future returns. Those in this market are practising what they preach. Despite the headline grabbing 13.4% average annual return between 1971 and 2009, asset managers have set more modest targets.
Invesco has a 4% net income target and an 8% total return, while M&G eyes a net distribution of between 3% and 4%. The latter’s total return is closer to the industry’s long-term average track record with Greaves saying that it has averaged close to double digits in the past four years. This is thanks to the capital growth gains from investing close to Crossrail stations or in areas where there has been regeneration or infrastructure improvements.
The fund has also benefited from residential’s low correlation to the other main asset classes.
“In fact, it has a negative correlation with gilts and a less than 0.1% correlation with equities,” Greaves says. “This has a place in a balanced portfolio, but amazingly at the moment it only comprises about 5% of
institutional investors’ portfolios.
“We believe that there is scope for it to follow the US [multi-housing] model where residential went from less than 10% to nearly 25% of institutional portfolios in 20 years,” he adds.
RETRO MARKET
The blocks that the private sector pension schemes of Lancashire and Northern Ireland have funded are not just places where people can lay their head at night. They are built specifically with a focus on lifestyle. There are en-suite bedrooms, wi-fi, rooms to host parties booked through an app, dry cleaning services, storage areas, supermarkets, wide corridors so residents can move their furniture around and even electric cars for hire. There is also an onsite team managing the property.
Professionals aged between 25 and 34 are the largest demographic taking leases in the private rented market. They are taking advantage of the sector’s flexibility of tenure, which allows them to move to new locations to develop their career without the hassle of buying and selling properties. This is a lifestyle choice where Knight Frank expects to see little change. It surveyed the opinions of 10,000 private tenants in June and found that 68% expect to be renting in three years time, a nod to the desire for flexibility.
Fry questioned the role that student accommodation is playing in setting expectations among young professionals. Purpose-built housing means that some people have already experienced a certain standard of living at university and want a better quality of accommodation than they could buy now that they are on the career ladder.
Affordability is another issue. Rising house prices resulting from inadequate supply are keeping some from stepping on the housing ladder.
Housing is not a new institutional asset class. It was a strategy for professional investors for decades until rent controls were introduced in the 1970s. The cap was abolished in the late 1980s to encourage private capital to help increase the country’s housing stock. Yet it took around 25 years for institutions to be tempted back into the market. “Institutions have been there before and got their fingers burnt during the rent control period,” Greaves says.
Rent controls mixed with high inflation meant that investors lost money. “People in institutions have long memories,” Greaves says.
A favourable government can be added to the investment drivers discussed earlier in this article as to why housing is back on the agenda in the offices of institutions throughout the City.
