UK institutional investors are significantly underinvested in the private rented sector (PRS), a potentially lucrative area of the real estate market, according to a whitepaper by Invesco Real Estate.
The firm says the PRS is the fastest growing tenure and highest performing real estate asset class in the UK, but institutional investors currently own less than 5% of the sector.
A growing residential supply and demand imbalance means investors could be missing out on an attractive return profile from the PRS says Invesco, particularly as it has also been less volatile than other more traditional real estate investment targets, such as offices and retail.
The paper compares the UK PRS with the multi-family rental market in the US, and finds that UK institutional investors are considerably behind their US counterparts in taking up opportunities.
This is in contrast to historic performance, which shows UK investment outstripping the US in this area in the past.
The research also found that there has been an increase in institutional transactions in the UK by cross-border investors. In 2014, over 60% of total residential transactions were made by non-UK investors, as recorded by data firm Real Capital Analytics. This marks a 10% increase, compared to 2013.
John German, director of residential investments at Invesco, says that the under-supply of housing and high population growth in the UK means that the PRS will continue to grow as a tenure, which potentially creates investment opportunities for institutional investors.
Separately, MSCI’s latest IPD UK Annual Residential Property Index shows that yield compression, foreign investment and a lack of supply have led to institutional investors being priced out of the London market.
The UK as a whole saw a total return of 13.5% in 2014, putting extra strain on investors hoping to enter the market, particularly in London.
Mark Weedon, head of alternatives at MSCI, says: “If you invested in London residential at some point during the last 10 years, the chances are that you’re laughing all the way to the bank. However, if you are looking to put money into the sector now, our data shows that investors seeking income will find themselves’ priced out by foreign investors and owner-occupiers when trying to buy existing stock in London.
“There is now a de facto exclusion loan on central London for most instituitional investors, at a time when concern over access to housing has seldom been higher.”
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