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Investec: HNW investors bullish about UK residential property

The bank’s sentiment survey revealed its private clients tip residential for sale and for rent to exceed expectations.

The residential sector for sale and for rent are the most sought-after investment classes for high-net-worth individuals invested in UK real estate, according to the results of a survey conducted by UK- and South Africa-headquartered bank Investec.

A survey of 110 of its private high-net-worth investor and developer clients revealed most expect to see returns in excess of predictions by property adviser Savills.

Investec reported that 70 percent of its private clients, who invest their own wealth into real estate, believe that five-year UK residential capital values will outpace the 13.1 percent growth predicted by Savills, while 63 percent said rental values will exceed the five-year increase of 19.9 percent expected by the property adviser.

Residential for sale and residential for rent emerged as the two most appealing asset classes, as selected by 49 percent and 47 percent of respondents, respectively. A chronic supply shortage is driving appetite, particularly for property in London and the South East, said Investec.

The Nationwide House Price Index reported that annual house price growth rose to 14.3 percent in March with average prices hitting £265,000 (€309,000), the strongest pace of increase since 2004.

But Capital Economics is predicting a 5 percent fall in house prices over the next two years amid the “fastest increase in mortgage rates since the late 1980s”. Meanwhile, the economic forecasting consultancy estimates that private rented sector supply needs to increase by 227,000 homes a year to meet demand.

Investec, which has a loan book to private real estate clients of around £1 billion, said that the private clients in its own book were demonstrating a stronger preference towards funding residential developments than its corporate borrowers.

“The residential sector was one of the best performing during covid, and private clients believe there is more to come,” said the report, attributing the sector’s appeal to “favourable underlying demand-supply dynamics and government stimuli”, alongside “the entrepreneurial outlook” of private clients.

Latest figures show that private clients are taking a higher percentage of development loans than corporate clients – 52 percent versus 42 percent, respectively. Out of those loans, 66 percent went into the residential sector.

Commenting on the results, Gary Sacks – chairman and chief executive of developer City & Docklands, which has 800 homes under development in London – said: “Clearly there’s some uncertainty around, but market sentiment is quite strong and there’s a lot of money to be spent. I think covid was a blip. We’ve already seen our rental income recover to 18 percent above where it was pre-pandemic.”

Investec’s chief economist Phil Shaw warned that investors needed to remain “mindful of the changing environment and employ sensible long-term strategies”.

He said: “A drop in oil and gas prices (as implied by futures markets) would result in higher GDP and lower inflation, according to the Bank of England’s figures. However, this won’t necessarily comfort investors because in either case there are still serious headwinds facing the economy over the next couple of years.”

Despite growing demand for regional space, according to Knight Frank, Investec’s private clients remain focused on London real estate, with 63 percent citing London as very appealing for real estate investment, putting it ahead of Birmingham (43 percent) and Manchester (45 percent).

Investec commented: “Reflecting [London’s] liquidity and the relative maturity of sectors including office, BTR and PBSA [purpose-built student accommodation], Investec’s loan book aligns with these findings.”