It is often said, with good reason, that there are billions in institutional money wanting to invest into UK residential. It is also fairly well known that there is a housing crisis – and a massive undersupply of housing.
No great leap of imagination is required to come to the conclusion that institutional investment could solve the housing crisis, and, in the meantime, create a nice, safe, demographically driven investment niche for the billions in pension pots.
Unfortunately, what investors want is yield: long-dated, secure and boring income. And what the UK is still struggling to create is a housebuilding model that works off a yield-driven return.
There is, of course, the burgeoning rental market, but it is far from an established asset class. An investor wishing to push £500m into the UK would be unable to buy anything.
So, what other options are there, and which ones could be ripe for expansion?
Converting an existing model
There is speculation that 2017 may see the first institutional transaction for a strategic residential land asset – think hundreds of acres and tens of thousands of units.
This may seem treacherously close to housebuilding, but strategic land assets have been evolving in the past few years, and a potential new investment class is beginning to emerge.
Ian Rickwood, chief executive at Henley Investments, says the recession left a break in the value chain and an opportunity for new players to step in. After 2008, there was less willingness among housebuilders to buy great swathes of land, gain planning permission, and supply the infrastructure.
“We provide the land for housebuilders,” he says. “We go and find land, buy it, and put in the infrastructure. By the time we have done it, we have sold to a housebuilder.
“That’s a new area of the market, and it’s for long-term investors – we will hold that land and sell over a 10-year period. You deploy your capital, you invest in infrastructure and you sell it, but you have a pre-agreed arrangement with a housebuilder.”
Essentially what this means is a long-term, stable income stream that works off phased selling. After the initial investment into the land, planning and infrastructure, the process is relatively straightforward, and thus has potential for institutional investment.
Nigel Hugill, chief executive at Urban&Civic, is confident about the potential for similar investments.
“We are entitled to about a third of sales values: we get £100,000 on a £300,000 house. There is no reason we cannot have a process where investors buy some of this. What we are on the verge of creating is [a structure where] investors can buy a licence.”
However, Hugill points out that this is not technically a yield-producing investment, and could be likened to a gamble on house prices.
“As opposed to an actual income-producing investment, it’s more like a five-year punt on the housing market. Basically, you get planning, you get infrastructure in place, then you sell. Essentially it’s the sale receipts.
“They buy the contracts off us after the housebuilder has already been appointed. It’s very simple because you get all of the end sales value.”
Social tie-ups
The other, semi-obvious, option is through partnerships with the public sector.
The government and local authorities are desperate to build more affordable and supported housing and replace the UK’s rapidly ageing stock, while housing associations have been given increasing freedom to borrow and work with the private sector.
Housing associations – or at least some of them – are starting to become big businesses. Recent announcements from the likes of L&Q and Places for People show the potential scale and ambition.
“Because of their remit, they can widen a bit now to private housing. They are not the staid institutions they once were,” says Jennet Siebrets, head of residential research at CBRE.
On the other hand, because of their charitable (or not-for-profit) status, there are still limitations and regulations over what can be achieved.
“Even though some restrictions are being removed, there are still many out there that will bite on investment activity,” says Jeremy Hunt of Trowers & Hamlins.
There is also always the threat of future government intervention – for instance, in rent regulation – which can curtail lending and investment opportunities.
“My only concern would be with all the new rules and regulations around Help to Buy: are they exposed? Would you want to invest in the housing association side of it?” adds Siebrets.
Separate to this, though, many housing associations are becoming increasingly active in the bonds markets. Places for People issued a bond worth £50m at the end of 2016. L&Q issued a bond in April 2016 worth £300m.
These bonds allowed investors to be a secured creditor for a housing association, and attracted considerable institutional interest. The only issue is that they are often snapped up pretty quickly.
On the other side of the social piece, the supported living sector is seeing a big boost.
Morgan Sindall Investments and the Universities Superannuation Scheme recently announced a £100m tie-up to invest in the sector, while Civitas raised £350m last year in a listing that created the first supported housing REIT, showcasing the level of demand.
As local authorities look to improve their existing stock, the sector has potential for growth – though it is ultimately capped in size.
Radical thinking
Realistically, these are sectors with potential, but to really tap into demand, there needs to be a change in thinking on how to approach the problem. So what kind of new products could be created?
“The government could create long-term income strips, linked to residential values. I still don’t understand why they don’t do that,” says Hoong-Wey Woon, director in real estate advisory at KPMG.
Imagine, he says, something like the Olympic Village – 2,000 rental homes – but stuck in the middle of somewhere such as Burnley. If the council would guarantee you the rent for the next 30 years, that can be used to go out and raise finance for the product.
“How can they get more housing for people around the country, get capital uplift and not take the development risk? Basically, take a lease on 5,000 residential units, then the developer can go and use that covenant to get funding,” he says.
Similarly, there is room to create new income-related packages from the products housing associations are making.
“One area a lot of people look at is shared ownership,” says Ian Graham, head of housing and regeneration at Trowers & Hamlins.
“The bit of shared ownership that the housing association owns produces a long-term income, and capital, as the remaining shares are bought out. There are a lot of associations that would be interested in selling that.”
“The problem is how you would value it,” adds Graham. “What it produces is a stable income. The difficult bit is the future capital payments by leaseholders.”
“Products such as these and the clear statement of intent from the government around shared ownership mean we expect to see more diversity in the residential market in the not-too-distant future – and that will come with a range of opportunities for investors to expand their portfolios and explore new options,” says Jules Bickers, director of housing for Capita Real Estate and Infrastructure.
Unmortgage products
At the other end of the spectrum are products that tap into regular, consumer-led housing demand, and attempt to institutionalise the lending on that. Any product in this area has the advantage of being able to tap into the £5tn owner-occupied housing sector.
The Unmortgage is a cross between shared ownership and a mortgage: buyers supply a 5% deposit for the house they want; institutions stump up the rest of the cash, and receive rent on the portion they paid for. Buyers can increase their ownership percentage when they want.
Its creator, Rayhan Rafiq-Omar, says institutions they have been speaking to – such as Hermes Investment Management and Legal & General – are keen.
“Beyond the social benefits, we are proving institutional residential can scale with Unmortgage: wannabe homeowners are motivated to source the best properties in the safest areas.
He says the buying process and data plays a big part in supporting the acquisitions, so it’s lower risk and clearly auditable, giving investors confidence.
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