By DOUG MORRISON
While demand for European high-end property has held up in the face of economic turmoil, the lower end of the residential property market has not fared so well. But a handful of European institutional investors have spied opportunity amid the mid-market residential gloom. They are putting in place strategies to target suburban properties, far from the prime real estate of urban centers. And the U.K. rented sector is in their sights. In particular young professionals who earn too much to qualify for social housing but cannot afford to buy their own homes. The so-called "rentysomethings".
Institutional investors had been conspicuous by their absence from the U.K. housing market of late but they sat up and took notice when Akelius, one of Sweden's biggest property groups, announced plans to spend up to £1 billion in the market over the next five years.
The Swedish group's bold declaration of faith in the U.K.'s private rented sector in November 2011 coincided with its first acquisition—the £4 million purchase of a block of 16 tenanted flats in Clapham, South London. This was a modest deal for a group with 34,000 residential properties across Sweden and Germany. But Akelius has since invested in several more assets and, says its U.K. adviser CBRE, is on course to take its spending to more than £100 million by the end of the first half of 2012.
By then, too, one of the U.K.'s leading social landlords, Thames Valley Housing Association, hopes to be well advanced in its quest for £170 million of equity and debt funding for its new subsidiary, FizzyLiving. With FizzyLiving, TVHA wants to create a portfolio of more than 1,000 new-build apartments available for private rent, aimed at young professionals in London and the southeast.
TVHA has already pumped £30 million of its own equity into the venture and in February bought its first 63 flats off-plan in a development by Solum Regeneration in Epsom, Surrey. Further acquisitions from house builders are lined up and the first heavily branded "fizzy" flats will be available for rent this summer.
If it takes off, FizzyLiving will be the first institutionally backed foray into the private rented sector by a housing association. Like Akelius, TVHA's move has created a stir in property circles. With their contrasting financial models, Akelius and TVHA each claim to have found a winning formula for acceptable returns from suburban property with good transport links and away from the investment honey pot that is prime Central London.
Akelius' target net income yield is 4%. TVHA believes the tax efficiencies brought about by the charitable status of housing associations, which means it does not have to pay value-added tax on expenses, will cut FizzyLiving's management costs by 8% and so offer investors an internal rate of return of at least 15%.
In both cases their prospective tenants are 25 to 35-year-olds who are in jobs, earning too much to qualify for social housing but not enough to save up for a deposit and a mortgage. They claim that such people are disenfranchised and will lap up rental accommodation that is managed by an experienced landlord with a long-term outlook on its investment. TVHA nicknamed them "the rentysomethings".
Nick Jopling, executive property director of Grainger, the U.K.'s largest listed residential landlord with £2.4 billion of directly owned assets in the U.K. and Germany, believes the time is right for the U.K. sector to shake off its reliance on small, buy-to-let landlords.
He points out that less than 1% of the U.K.'s housing stock is held by institutions. In contrast, between 10% and 15% of the housing stock in other European countries is owned by institutional investors. The U.K.'s Treasury has acknowledged this disparity with proposed reforms to real estate investment trusts, which some believe will lead to the U.K.'s first residential REIT in the next year or so. In its recently published Housing Strategy, the Government also promised to examine investment in rental property as a means of easing the U.K.'s housing supply crisis.
Mr Jopling says: "The re-emergence of institutional investment in the rented sector in the U.K. is because many of the previous barriers have been overcome—political pushback, reputational concerns, benchmarking and property management capability are no longer the hurdles they once were. Many institutions are no longer asking, 'Why residential?' but instead 'How?'"
CBRE says the private rented sector has outperformed commercial property and equities with average total returns of 10.5% over the past decade. Chris Lacey, CBRE's head of residential investment and adviser to Akelius, says: "Fund managers and asset allocators are going to have far more of a responsibility to look at residential and justify why they wouldn't go into the sector."
Lessons from Berlin
Even if fund managers are persuaded by the U.K. investment case, however, sourcing assets is far easier in established rental markets such as Germany, and no less attractive. CBRE says transaction volumes across German residential property portfolios of more than 50 units increased by 44% to €6.12 billion in 2011.
Domestic investors accounted for €4.35 billion (more than 71%) of the overall investment total, followed by investors from the U.S. (5.7%), Sweden (4.2%) and Austria (3.4%). "German residential is regarded as a secure investment at a time when the European sovereign debt market is in crisis and international capital markets are volatile," says Konstantin Lüttger, CBRE Germany's head of residential investment.
Demand for housing in Berlin was particularly strong. The federal capital traded around €2.3 billion and more than 32,300 residential units last year, or 37% of the registered investment deals in Germany.
The figures show just how far the U.K. rental sector has to go. As Michael Schlatterer, CBRE's Berlin-based head of residential valuation, puts it: "Berlin is underpinning its position as the most important and most functional local transaction market for residential real estate in Europe."
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