The private rental housing sector could provide long-term income for the Local Government Pension Scheme (LGPS), Invesco Real Estate claims.
Changes to the government’s pooling proposals mean that these schemes can hold infrastructure assets to reduce risk in their portfolios. So investing in private rental assets could not only help satisfy their investment needs but also keep the regulator happy.
Invesco’s £450m rental portfolio generates a 4% net income and an 8% total return, which is slightly better than the returns from core commercial, senior director Andrew Hills told portfolio institutional.
A lack of scale has traditionally deterred institutions from the residential market. Hills puts the size of the UK residential rental sector at £1.2trn. “To put that in context it is two-thirds the size of the FTSE All Share and nearly 50% larger than the commercial property market,” he said.
So the market is deep and with institutions building assets with hundreds of units the opportunities are now there.
Investors from around the world have noticed the UK’s potential in this market. In the past 18 months institutions in the US, Germany, Australia, Canada and the Netherlands have invested in Invesco’s residential rental fund.
“These are experienced residential investors,” Hills said. “That is a nice tailwind of the opportunity because they understand the asset class.”
Demand is likely to remain strong thanks to population growth and inadequate supply of new homes. Invesco estimates around 1.1 million new homes will have to be built to meet demand by 2020, up from 600,000 in 2014.
Constrained supply means that people are being priced out of the market, while younger people need more flexibility due to work driving rental demand.
Invesco has a £1bn pipeline of assets in this market.
