28 February 2023

How institutional investors can boost the UK’s private rented sector

How institutional investors can boost the UK’s private rented sector image

It is well documented that the UK faces a housing shortage. Indeed, according to Unison, the public services union, the UK needs to build at least 340,000 homes per year -- as currently, not enough homes are being built to meet demand.

The problem is made worse when you consider that of the available social and private rental housing stock, much of it is not fit for purpose. The Government paper from June 2022, ‘A Fairer Private Rented Sector’ says: ‘The reality today is that far too many renters are living in damp, dangerous, cold homes, powerless to put things right, and with the threat of sudden eviction hanging over them.’

While the situation is unacceptable for residents, rogue landlords and poor maintenance within the private rental sector can cause major issues for local authorities who are often at the sharp end when it comes to sorting out these problems, diverting valuable time, money, and resources away from the already hard-pressed budgets.

When it comes to private rented homes, surely the golden ticket is to increase the volume and ensure housing stock is high quality, is well-managed and built in locations where it’s needed the most.

How can we set the wheels in motion to turn this wish-list into a reality?

The power of institutional investment

Institutional investors, including public and private pension funds, insurance companies and savings institutions have the potential to make this change.

By investing in residential housing for the private rental sector, institutional capital has the power to provide a boost to the UK’s private housing stock, both in terms of the numbers being built, and by providing reassurance to tenants that they will enjoy a high-quality, energy efficient home which is owned and managed by a bone-fide landlord.

There is a precedent. According to McKinsey's 2021 report on the industry, an average of 16% of a typical institutional fund will be devoted to real estate investment. Even if a small proportion of this is diverted to the private rented sector, we will see a significant sea-change.

Social impact

The benefits of institutional investment in this sector go above and beyond the ability to deliver good homes in volume.

Despite the pro-ownership rhetoric, we hear time and again from Government, not everyone wants, or is able, to buy their own home. According to English Housing Survey 2021 - 2022, the share of households that were occupied by private renters hit 19% – a significant proportion. By providing good quality homes in attractive locations, which are affordable to families with average incomes (think young professionals and key workers, for example), some of the pressure on the current housing situation will be alleviated.

Of course, it will take time. It’s not an overnight fix. But, by investing in the private rented sector, institutional funds, typically seeking long term investments with stable returns, can commit for the long haul, providing well-maintained homes for average earners.

A regional focus, for investors who want to see the fruits of their investment within their own area, can also be achieved through an element of a regional bias possibly within a broader investment portfolio, thereby delivering homes within a specific geographical area and creating employment locally in the process.

When it comes to quality, institutional investors have an inherent commercial incentive to maintain properties well and to carefully select their residents and look after them. Good quality housing equals happy committed residents, which in turn equals resilient returns.

Against a backdrop of a largely unregulated private rental market, it feels like a win-win situation.

A drive for sustainable homes

Institutional capital can play its part in the drive for more sustainable housing in a way that private landlords simply can’t. By working to specific, high-level criteria around factors such as energy efficiency, provision of electric car charging points, access to community amenities or green spaces, for example, investment is made in property which will meet the ESG requirements of the investor while simultaneously delivering quality, sustainable housing for tenants. Not to mention the associated cost savings which come from living in well insulated, energy efficient homes.

A diversifier for institutional investors

Institutional investment in homes for the private rented sector will not only serve to alleviate pressure on the UK’s current housing stock, but it will also provide local authorities with the reassurance that the standards of these homes are high, something that will be welcomed by the essential workers and professionals that will live in them.

For investors, residential property for the private rented sector can act as the ultimate diversifier in mixed asset portfolio. In the longer term, demand for quality rental housing aimed at people on average salaries will continue to outstrip supply. And as an investment, it offers institutions steady, long-term, resilient income, with potential for capital appreciation over time.

Indeed, institutional funds not only have the power to lay the foundations, but to build a positive future for the UK’s private rental housing sector.

Cedric Bucher is CEO at Hearthstone Investments.

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