Moving up the gears
International institutional investors want in on the private rented sector in the UK, says independent property expert Sam Collins
It’s a matter of no small consequence to many that the UK housing market has plateaued, with whispers of an impending dip on the horizon. This has left a lot of people concerned not only about what this might mean for the economy as a whole, but also what impact it may have on overseas investors. Property throughout the UK, but particularly in London, has long been seen by the wealthy foreign investor as a safe place to rest capital. While there have been rumblings that falling property prices are likely to stop this flow of transcontinental cash into the country, it seems that the growing appeal of the UK private rental sector (PRS) tells a different story.
PRS has, until relatively recently, been the playground of the small-scale investor. Many a wise couple from the older generation built their retirement fund upon it, having snapped up a couple of two-bed semi-detached houses at an auction in the 1980s. Then there are the middle and upper classes who bought a couple of student flats to help their kids through university, then kept them on and rented them out to future students, and are now also reaping the rewards of their investment. Freelance builders, too, found that refurbishing and letting out houses of their own brought in more money than creating new builds to cater for the wider market. While private portfolios were created, PRS was never really within the sphere of big businesses. This, however, appears to be changing.
Looking at today’s market, the evidence suggests that foreign institutions and fund managers are actively exploring large residential block purchases for private rental tenants, driven by the return on investment the long-term revenue stream presents. Even in a slowing market, a well-managed, well-let PRS apartment can command strong yields, so while commercial investments have shown some signs of cooling, overseas investors have been encouraged to explore alternative property asset classes.
In well-connected areas, institutions are investing heavily in residential properties. Why? Well, whichever way you look at it, there is a significant shortage of housing in London and throughout the UK. Although there is talk of various legislations being introduced by London mayor Sadiq Khan to curb over-priced rental rates, should such a move take place, the implementation will be some time in the offing. Even with the threat of a New York-style rent control being introduced, the fundamentals will remain the same. With demand still outstripping supply, it will continue to be a landlord-favoured market, making PRS a solid investment that has a long-term strategy, delivering a fixed, regular return for very little continued expenditure.
The appeal of PRS to overseas investors has been added to by the continued weakness of the pound. Although there has been some talk in recent weeks about a potential interest rate rise, which in turn has stimulated the strength of the pound, British property still presents a relative bargain in investment terms. Consequently, overseas institutions have been actively purchasing whole new-build blocks to market to the private rental sector.
Although the practise of purchasing in volume may be frowned upon in some areas, as well as potentially adding to the housing crisis by blocking first-time buyers out of the market, there is still—and probably always will be—a high demand for rental accommodation. Not everyone wants to buy a home, and certainly not at the beginning of their independent lives, so, although overseas ownership of PRS properties might not be the ideal scenario, it does provide an instant resolution to a very real problem.
Block PRS purchasing instantly opens up the rental market, providing cohesively managed blocks for a wide range of tenants. Rather than sitting half empty, waiting for independent buyers to come along, swathes of properties become available en mass. Not only does this help potential tenants to find homes, but it also facilitates the British building industry in the short term, by delivering a waiting market to the volume house builders. As more properties are sold, more can be built, helping to further alleviate the housing crisis and stimulating the economy through a mutually beneficial investment strategy.
Since the beginning of the global economic downturn a decade ago, Brits have had far less cash to spend on investment properties. The rental market is overcrowded, but there have been few new private investors coming into the field, and it is this as much as anything else that has enabled the more unscrupulous landlord to raise their prices to unmanageable highs. The injection of funds from overseas investors may mean that, in the long term, money will be leaving the UK, but for now it alleviates a number of difficult problems. And while cash is going out of the country, it is also coming in and I don’t believe that that can really be a bad thing for anyone.