New report seeks to understand the main challenges faced by institutional investors considering investing in the residential property market.
A perception of low yields is the biggest barrier to institutional investment in residential property in the UK, according to an in-depth new report from leading property advisor, Hamptons International.
At a time when Mayor Boris Johnson has described institutional investment into the residential sector as the "holy grail", Hamptons International conducted detailed interviews with seven leading banks and pension funds based in the UK, Continental Europe and the USA. The interviews probed the industry leaders on the perceived challenges to investment in the residential sector.
Cash is King
The series of interviews concluded that while there is strong and growing interest in the residential sector, two main barriers are preventing at-scale investment activity. A perception of low yields are considered to be the main barrier to residential investment, with target gross yields assumed to be between 4.5 and five per cent compared with the 5.5-six per cent associated with commercial property.
The report also highlights the distinctly different approach for institutional investors that rely instead on an income-generating model rather than a model based on capital growth, making the yield a more important investment driver. One interviewee commented: "Residential can only be an opportunistic play unless the yield improves. It just isn't core without a reasonable income stream."
Lack of Stock
With interviewees consistent in assuming that a residential fund would need a minimum of £500 million in assets under management to achieve the necessary economies of scale to make the investment worthwhile, a lack of stock was listed as the next most significant barrier to institutional investment in the residential sector.
The significant misfit between the largest investment deal done in recent years - the purchase of the Terrace Hill portfolio of 574 units by Akelius for £75 million - and the perception that an institutional-grade residential fund would need a minimum of 2,500 properties, also led interviewees to believe that there is an insufficient volume of existing and appropriate residential stock available to achieve the necessary scale.
Call to Action
The pursuit of a Build to Let sector in the UK as the only way to attract institutional investors, according to the report's conclusion. Support for a Build to Let sector will allow 100 per cent private rented blocks to be built efficiently and at scale, offering higher net yields as well as the ability to acquire a large number of units in a single transaction.
The report calls for Government efforts to encourage the sector to grow need to be focused on how this type of building will be treated by the planning process. To facilitate institutional investment, there needs to be clarity on how Build to Let proposals will be handled in terms of S106 requirements, notably for affordable housing.
Adam Challis, Head of Research at Hamptons International, commented on the results of the report: "This report offers a fascinating insight straight from the "horse's mouth" into the challenges faced by institutions who are considering investment in the residential property sector, a topic which has long been a focus of the British Government.
The results of this report are a clear message to Government that if it wants to see institutions invest in the residential market, it needs to make Build to Let a viable option for investors. The ability to create modern, efficient and bespoke private rented buildings constructed at scale without the burden of restricted planning policies will have a fundamental and positive impact on institutional investment in residential property."