“The rental sector is rising more quickly than owner-occupied. Some of this is due to affordability, and lack of supply, but also the desire for mobility,” he says. Young, professional classes want greater flexibility and are willing to forego the purchase of a home for short-term leases. Though their demand for property is appealing, “the execution is challenging,” adds Patel.
Alex Greaves, fund manager, residential at M&G Real Estate doesn’t necessarily agree. The PRS now houses four million households, a figure that has doubled over the last decade. Most of these households live in accommodation provided by small scale individual landlords, buy to let or even overseas investors. So what’s stopping the growth? Seemingly not very much.
The timing seems to be perfect, as pension funds search for income. The UK is 30 years behind Europe and other markets in terms of residential house building, so there should be an excess of demand. The performance of residential has also been strong. At the end of 2013, the IPD UK Annual Property Index showed residential had outperformed all other sectors and over time, but a lack of supply of the right kind of stock is preventing the institutional market from developing, says Greaves.
“This is all about commercialising the rental sector, which was done with student accommodation about 15 years ago. We have to build for purpose, deliver high quality services, robust processes and cover all markets, from Aldi all the way up to Waitrose in terms of stock.”
Private, not social
The discussion of expanding residential focuses on the PRS, not social housing. Though some asset managers operate in that sector, there is division between what is considered real estate and infrastructure that some don’t want to cross. Social housing has its own potential problems, in terms of regulation.
“Intervention by government means rent controls are feared because we want rents to be market-led,” says Patel. “If the government waded in with rent controls, institutions will come out of the market again.”
Though the Labour Party in opposition has warned it will control utility prices if and when it comes to power, few believe any future government would intervene in the PRS these days, as the trend, particularly across Europe, has been to deregulate. The core residential market is essentially professional groups aged between 25-34 as they want to live near to town and don’t have to concern themselves with schools, off-road parking or golf clubs. They also have the highest wage growth and flexibility.
Like commercial property, the pressures of location have forced investors to consider various alternatives. In London, that means “nowhere there’s a Boris bike, because it’s too central,” says Greaves. “This means zone three and beyond.” Manchester, Birmingham and Leeds have seen low levels of rental growth and lag the capital for capital value growth, but the areas serviced by HS2 and Crossrail offer excellent targets, Greaves says.
None of these developments take into account the potential for government-backed stimulus packages, such as Funding for Lending or Help to Buy. This is in part due to the fact that investors want long-term income streams and so a single sale is development, not investment and few see how such projects might kickstart the ‘institutionalisation‘ of residential property.
However, changes to permitted development rights (PDR) must offer an opportunity for investors to access properties no longer fit for business purpose in secondary or tertiary business districts. Sanderson at Hermes is unconvinced. “While there are a lot of creative developers out there, it’s not a panacea. You need to sell units, not rent to workers and the economics only work if you sell at £1000 a square foot,” he says. “And the challenge will be if a building didn’t work as a commercial property, it is not clear as to why it should work as a residential property.”
But Ben Habib, chief executive at First Property Group, rejects that view and is using PDR to develop a residential portfolio. “Technology has already transformed the way we consume with massive structural and irreversible impact upon retail property portfolios. This makes perfectly viable properties available for conversion to residential,” says Habib. That said, some authorities, such as Richmond and Islington, are making it difficult for developers by using ‘article four exclusion’, which means PDR does not apply and any developer has to go through the normal planning process, much to Habib’s annoyance.
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