Can UK PRS replicate the success of student housing?
A sector in its relative infancy, the UK's private rented sector is becoming increasingly appealing to investors, particularly those seeking long-term income.
The UK’s private-rented sector (PRS), is charting a similar growth path to student housing amid burgeoning interest from international investors.
A sector in its relative infancy, UK PRS is becoming increasingly institutionalised, says Gianluca Romano, Global Head of Underwriting and Advisory for JLL’s Funds Advisory group, which is making it more appealing to investors, particularly those seeking long-term income.
“It’s on a fast track to replicate the institutionalisation seen in the student housing sector,” says Romano. “There’s a lot of capital chasing PRS so that transition is going to happen quickly.”
On the right path
International investors are particularly keen on student housing’s defensive qualities, something Romano says PRS also offers.
“Investors with an eye for steady, reliable income have already made inroads into UK PRS,” says Romano. “North American – particularly pension funds – and European investors like the sector.”
Canada Pension Plan Investment Board (CPPIB) this year teamed up with property and infrastructure group Lendlease, in a £1.5 billion partnership to invest in rented residential development.
Typically low-risk and income-focused in their approach to real estate investment, German institutional investors this year followed their Dutch counterparts into UK PRS. Cording Real Estate Group this year attracted £100 million from German institutional investors for a new PRS fund. The manager is looking to raise a further £150 million of continental capital to invest over the next four years.
For the Dutch, investing via joint ventures has been the main route into UK residential. Dutch asset manager PGGM joined Legal & General’s direct investments arm in a partnership to invest £600 million in UK residential property in 2016, while fellow Dutch asset manager APG has previously teamed up with Grainger to invest in the sector.
Yet some investors remain cautious as currency fluctuation gives euro-denominated investors a reason to pause.
“Currency is of course a factor for investment committees to sign off on – but conversely, those who have already invested in UK PRS see the value in holding on to their investments,” says Romano. “There are plenty of long-term-hold investors out there.”
With institutional capital typically shying away from building and development risk, the sector’s gradual rebranding from “private-rented sector” to “build-to-rent sector” has not deterred investors.
“Forward-funded structures, where investors take primarily leasing risk with mitigated construction risk and no planning risk have proved popular,” he says.
In addition, a historic undersupply of homes in the UK continues to sustain demand, he says.
“Capital continues to flow into the sector,” he says, pointing to the fact that the UK market trending away from home-ownership towards renting.
That is in part due to general affordability issues in the UK and banks’ drive to balance their books following the global financial crisis by turning off the funding tap for both residential developers and for first-time buyers.
In Manchester, the proportion of home-owners was just 26 percent last year, compared with 53 percent in 1984, according to the Resolution Foundation. In outer London, the proportion is just 16 percent, down from 53 percent.
If the sector is to truly replicate the growth of student housing investment, the ability to track the sector’s performance will need to be improved, says Romano. Recent JLL analysis of seven build-to-rent schemes in the UK found that there are now growing data volumes on rental levels and vacancy.
“More transactions are needed if investors are to be able to benchmark the sector,” he says, adding that the emergence of a PRS real estate investment trust would further boost the sector’s appeal. “When you ask what the average yield is, it’s often hard to get a consistent answer as there simply aren’t enough transactions right now to refer to.
“But institutional capital continues to target the sector – and that’s raising the sector’s profile across the globe.”
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