The UK’s housing market remains way off hitting the Government’s target to build 300,000 new homes annually. The supply/demand imbalance is acute, especially in London where house prices have bolstered the private rental market with M&G Real Estate forecasting 3.8 per cent annual rental growth in Greater London and the South East over the next five years.
The UK’s private rented sector (PRS) has grown 100 per cent in the past decade with 95,918 Build-to-Rent homes either complete, under construction or in the planning phase. Local authorities, as well as institutional investors looking for long-term income streams and capital preservation are entering the PRS market.
This growing confidence is likely to drive yield compression in smaller regional markets outside of core centres such as London.
In a 2018 ‘Alternatives Predictions’ white paper, Jones Long LaSalle predicts that more GBP3 billion of deals this year, with institutional investors and the public sector taking a more active role. The PRS market in England has grown such that it now represents 4.5 million houesholds – equivalent to 20 per cent of England’s housing market according to M&G Real Estate. This is up from 10 per cent in 2001.
JLL’s residential investment team are certainly upbeat, not just in relation to deal flow. They also forecast an increase in total returns and income, and a strengthening of yields for the UK as a whole. And with housing completions for 2018 estimated to be less than 150,000, the need for continued investment in the PRS market to meet the demands of a growing population make it an attractive sub-set of the real estate investment space.
Not only does PRS have a low correlation to commercial real estate, equities and bonds, it is also exhibits good defensive characteristics and is supported by favourable underlying fundamentals: namely, a growing economy and increasingly high barriers to home ownership.
There are numerous examples one could cite, to illustrate the pace of development in this space. One example is Material Store, developed by HUB, which sits within the Old Vinyl Factory regeneration scheme, the former home of EMI Records, in Hayes, West London. The project will give rise to 189 PRS homes, including 26 triplex apartments, as well as leisure facilities for residents.
Another example of institutional demand is confirmation that Barings Real Estate has acquired the Keel at Queens Dock in Liverpool, Northwest England; a 240 unit multi-family property which it acquired from Moorfield Group for GBP46.75 million.
There are no clear or obvious signs that the number of people renting in the UK will recede any time soon, given the chronic shortage of housing. Indeed, a 2015/16 English Housing Survey found that only 60 per cent of PRS households surveyed expected to move into owner-occupation, with most only expecting to do so “after five years or more”.
Darren Hutchinson, Managing Director – Head of U.K. Real Estate Transactions at Barings, said that the Keel acquisition was a “rare opportunity” to acquire a PRS asset in an iconic building. “We believe there is an opportunity to add value through leasing up the vacant apartments and capturing rental reversion as a number of short term leases in The Keel expire…We have extensive experience managing and investing in multi-family properties in the US and our acquisition of the Keel is a great start to our strong ambitions to expand that expertise to the UK,” said Hutchinson.
Favourable demographic trends, a continuing supply/demand imbalance in the housing market and attractive rental growth prospects, not to mention stable long-term returns, combine to make the UK’s PRS market a particularly strong investment proposition for the institutional investor community. Whether Brexit has any long-term impact on this sector remains to be seen, however.
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