Multi-Family Housing: UK housing crisis is also a rented sector opportunity

John German of Invesco Real Estate explains why the UK’s private rented sector offers compelling investment characteristics for institutions, in conversation with Andy Thomson

John German
John German

If the cost of food had increased proportionately with that of housing in the UK, then that country’s famed Sunday lunches would become a rare treat. Research by charity Shelter found that if the price of a chicken and leg of lamb had increased at the same rate as housing since the 1970s, they would be priced at £51.18 and £53.18 respectively.

Affordability is thus a key factor behind the decline in UK home ownership, with the average cost of a London dwelling having reached £550,000.This driving up of prices is the result of a classic supply and demand imbalance, as a fast-growing population – and an increasing number

of households, resulting from more family break-ups and people wanting to live alone – searches for a withering supply of stock.

Research from the Town and Country Planning Association in November 2015 found that the UK needs 220,000 additional homes until 2031 – but only 54% of that number is now being built. To catch up with the rate of housebuilding required to meet demand by 2020, more than 310,000 homes per year would need to be built over the next five years.

One knock-on effect of this trend is a migration from home ownership, which is falling, to the private rented sector (PRS), which is growing fast.

This trend is shown in data from the English Housing Survey. While across the UK, the PRS accounts for around 20% of the housing stock, almost half of 25 to 34-year olds are in the PRS (48%). In Greater London, just under 30% across all age groups are in the PRS and owner occupation stands at just 50%, compared with 66% in England as a whole.

UK residential sectors long-term outperformance (to December 2014)

New asset class

With this shift to the PRS, firms such as Invesco Real Estate are noticing the emergence of what may prove to be a new and compelling asset class.

John German, the firm’s London-based director of residential investments, says: “We are keen to focus on finding investment classes that match our clients’ liabilities.That means we try to find an income stream, correlation to inflation and diversification, as well as a good total return. In the residential sector, we see the PRS as the area that provides a lot of the attributes our institutional investors look for.”

An integral part of the opportunity, says German, is to provide the kind of rental accommodation – fit for the modern generation – that is very hard to find. He points out that almost half (48%) of the PRS housing stock was built before the end of World War Two in 1945, while only 18% of the total was built in the past 25 years.

German is keen to help kick-start a process that began in the US some 30 years ago and which has grown into that country’s huge multi-family housing sector of today.

“We’ve been investing in multi-family in the US for over 30 years and in Asia for over nine years and believe the time is right to use our global expertise in this sector to invest in the UK,” he says. “Given the demand-supply imbalances and a growing UK population, we firmly believe the UK private rented sector offers potentially attractive opportunities for institutional investors.

“In the UK today, the market is pretty much what you saw in the US 30 years ago,” he adds. “Students have been used to living in housing where nothing worked. Now, we have seen the emergence of purpose-built accommodation as an institutional asset class. We see a great opportunity to create similar bespoke product for the rental market and the government is being very supportive of build-to-rent.”

These days, those considering renting properties are increasingly discerning about location, size of accommodation and the kind of services required. In London and other big cities, where car ownership levels are lower than elsewhere, being close to public transport hubs is often also a major consideration.

When Invesco Real Estate completed a UK PRS deal last year – a £32.5m forward funding of a 118-flat development in Hayes, west London – the transport aspect was important, particularly in terms of commuting time to central London.

“The flats are three minutes’ walk from a train station and you can get to Paddington in 20 minutes. The Crossrail link will help, as you could then get from Hayes to Bond Street in 22 minutes – much less than the circa 45 minutes that it currently takes.”

US NCREIF Index v UK IPD residential index, total returns, 1982-2013

‘Creating something different’

Also important was ensuring that the layout would be desirable, which meant making better use of the available space than has traditionally been the case with rental properties. “We want to create something different – open plan, lots of daylight, you go straight from the front door into a large open space and either side you have equal- size bedrooms with walk-through closets and en suite bathrooms,” says German.

The offering also includes an option to pay extra rent for various amounts of internet usage, an on-site manager to ensure tenants are safe, storage units and parking spaces.

While this may sound like fine details, the key point is that by creating a compelling offering, Invesco Real Estate believes that it can create a strong, reliable income stream for investors. “You start to create an income stream that looks like commercial investments,” says German. “Some people raise the objection that a bad tenant might not pay the rent. But even if that’s the case, in Hayes that would be one person versus 117 others still paying their rent monthly.

“Any offering can go spectacularly wrong. But in a downturn you can adjust rents down if you need to and you get less money, but you don’t get a liquidation scenario.”

For the time being, Invesco Real Estate is focused on London but German says the firm is also interested in gateway cities such as Birmingham, Bristol, Manchester and Leeds. “It’s a UK-wide approach and we’re very focused on sourcing opportunities off- market,” he says. “We have a pipeline of over £1bn in opportunities, which comprises about 13 deals, eight of them off-market.”

German says Invesco Real Estate is keen to work with contractors and developers that can offer multiple sites. In return, Invesco can offer to forward-fund a hefty chunk of any development.

He says: “If you’re talking about a 900-unit development, a housebuilder might sell 150 a year, so it will take six years to sell them all. But we can forward-fund, say, 300 units.When the contractor or developer then sells its 150, that’s 450 out of 900 sold in the first year – and that works well for both parties.”

A long journey

He adds that institutional investors now hold around £5bn of investment in the UK PRS, a market worth £1.1trn, but that this figure can be expected to grow substantially in the period ahead. “It’s been quite a long journey [educating people about the potential of PRS] and I’ve been banging the drum for a while,” he says. “But now there are a number of new entrants.”

He sees this increasing interest as a good thing. “A firm like ours might consider ourselves lucky if we’re the only one in the market, but that’s not great for our investors. They want an investable and tradable asset class and the entry of institutional investors will ensure that this will happen in the next five years.”

He concludes: “It is encouraging that some interest we are seeing in the UK PRS is from North American institutions, which clearly recognise the opportunity here, given they’ve been investing in the multi-family sector domestically for the past 30 years.”