Why institutional investors are looking to the UK private rental sector
One of the driving forces behind institutional investment from the likes of Aviva Investors and Legal & General is the potential size and value of the poverty reduction strategy – today it is worth £1.4 trillion, 19 per cent of the UK’s £8 trillion housing market.
By contrast, the FTSE 100 was worth £2 trillion at the start of January 2023. While the popularity of build-to-rent schemes with institutions has grown rapidly in recent years, less than 1 per cent of the UK housing market is owned by institutions. This leaves huge potential, which is attractive to institutions looking for stable, long-term investment opportunities.
The potential for a large and increasing return (income as a proportion of value) increases the attractiveness of the UK’s poverty reduction strategy. Rental income, which is broadly similar to wages, is considered reliable due to the necessity of the product – the home. Rental demand is increasing due to pressures on the housing market resulting from constraints on affordability and population growth. Demographic trends indicate that this growth will continue.
The Office for National Statistics expects the number of households in England to rise by 1.6 million (7.1 per cent) in the ten years from 2018, to 24.8 million in 2028 from 23.2 million. The increasing demand for housing, and through it the growth in the proportion of renters, translates into a reliable source of income linked to wage inflation.
Rental demand is increasing due to pressures on the housing market resulting from constraints on affordability and population growth
The returns that can be achieved are a product of factors such as location and property type. As an indication of regional diversity, the PRS today offers returns of between 3 per cent and 12 per cent for single-occupancy apartments and houses, depending on the geography: investments in prime locations in London are at the lower end of the scale; Investments in less economically prosperous areas are at the upper end.
The range of risk rewards in different geographies and models facilitates investments across the risk spectrum, from “fundamental” returns in safer locations to “value-add” in riskier geographies.
Ninety-five percent of the projected population increase is due to shrinking household sizes. and households consisting of one or several adults without dependent children, making smaller housing options, which typically generate higher returns, attractive.
Safe as homes
The reliability of residential property values contrasts with stock market fluctuations. For example, the FTSE 100 index, a diversified and reliable source of value, can fall by 30 percent in a single day. The value of other direct real estate sectors such as offices has fallen by 20 percent in the past year.
(tags for translation) Investments