Letting the big funds into the housing market

28th September 2011

Demand for the first is huge and supply is restricted – and could be more so as local government is increasingly squeezed.

As importantly, social housing applicants need to show housing need – and just wanting somewhere nearer to work or in a more pleasant area is not sufficient.

That leaves the private sector and its horror stories. Bad, even mad landlords and awful properties make up one side.

But bad, even mad tenants are the other side of the coin, and many others!

Does renting have to present this stark choice? Only in the UK, it seems. In the US, Germany, Switzerland, the Netherlands and many other countries, long term tenancies are the norm, not the exception. In Germany, for instance, it is common to rent for some years (in the same property) until you have children, then buy, and then, on retirement and family downsizing, return to the rented sector. Many well off Europeans and Americans spend their entire life renting. Properties often come with laundries, crèches and gyms as part of the rent. 

So what's the magic formula which works in those countries and is seemingly absent here?  It's the ability of investors to think long term. It's having landlords who treat tenants as adults – and vice versa.  There are well-defined  rights and responsibilities on both sides. And those letting properties are often specialist companies – institutions, investment funds and insurance companies – rather than accidental landlords or someone hoping to make a quick buy to let killing.

The UK property scene is noticeable by its absence of institutional and company investment in the residential property market. Other than one FT-SE 250 quoted firm, Grainger, there are few landlords on the European/North American model.

Grainger claims its advantages include higher levels of service, professional property management that is deliberately kept in-house, and a flexibility that can range from long to short periods – most small landlords prefer six or twelve month contracts because they fear having tenants with longer term tenure. Do tenants pay more? Grainger says no – its cost of finance is lower, it does not spend 15 or 20 per cent on "managing agents", and it can only charge the market level for a particular property in a particular area.  Grainger has some 14,000 UK properties so it's well under one per cent of the housing market.

The reason that UK institutional and big company interest in residential rentals is so low is down to a simple chicken and the egg quandary. There is no housing supply for investors to put their money in and until there are private sector investors prepared to place their cash, there will be no supply.

Rental companies cannot easily compete with house builders. Builders buy land, put up properties and then sell for as much as they can. Then they can recycle the sale price into a new project. Renters, by contrast, have to put up the money but then collect rents possibly for decades before they can make a return. So the finances are difficult – especially as land is so expensive in the UK. At the same time, planning constraints are difficult to overcome.

Institutions such as pension funds and life companies are happy to invest in commercial property such as office blocks and retail parks. They do this on the basis of valuing a property by rental yield – unlike buy to let landlords, they don't factor in potential capital gains.  Institutions don't want to be bothered by tenants with blown fuses or blocked loos  – in most other countries, tenants take care of repairs.

One possibility, under current exploration by Grainger, is a link-up with local authorities or government departments with spare land. Some have said they are happy to leverage in spare public land and take the returns over a long period. Grainger has just been appointed by the Ministry of Defence to redevelop old barracks land at Aldershot.

Other attempts to get the concept off the ground have come to nothing – again on the chicken and egg principle. Last year, Aegon Asset Management (now renamed Kames) tried to get a fund off the ground – but it failed to attract interest as there were no existing properties.

And a fund run by Grainger itself has twelve investors of whom nine come from overseas countries where they understand the concept.

More recently, BarCap (Barclays Capital) launched what is intended to be a £3bn fund in conjunction with UK Regeneration. It said: "The much-vaunted dawn of the UK's private rented housing sector came a step closer today, as housing minister Grant Shapps supported the launch of a £3bn private rental vehicle. Barclays Capital has backed economic growth body UK Regeneration in the creation of the fund, which promises to build 20,000 rental homes by 2020.

It is understood to be in the market already, seeking further equity and debt for the project, which will focus on buying local authority land under the government's "build now, pay later" programme. It will target town centre and inner city sites of around five acres. These are expected to provide 500 new homes and have a development value of £150m. They will be designed as campuses, with around 70% of the space developed as private rented residential and the rest taken up by shops and restaurants."

Will it work better than previous attempts? Come back in ten years time to check it out.

More from Mindful Money:

Property: House prices are on the slide (but commercial is still looking good)

Property: Should you invest in student digs?

Are the days of couples buying their first home in their early 20s all but over?

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