As the UK residential rental market goes from strength to strength, there is an accompanying rhetoric that it must be purpose-built to succeed.
Advocates say schemes designed for renters mean greater management efficiencies and better tenant retention. The government has shown its preference for build-to-rent through stamp duty changes.
That is bad news for housebuilders, which are increasingly looking to offload chunks of their schemes as the market worsens. They are hoping that the new breed of rental operators, flush with institutional cash, are not averse to buying standing stock.
According to the IPD/MSCI Residential Index, where the majority of stock is not purpose-built, returns have averaged 9.2% in the last 10 years, against commercial property’s 5.7%. While standing stock may not be flavour of the month, it retains its advantages. Much depends on price, but also management, flexibility, and how the investor measures returns.
Purpose-built preference
Grainger has shown a growing preference for purpose-built stock in recent months, but the UK’s largest listed landlord has been buying standing stock for years and will not rule out buying more.
“There is an opportunity to work with housebuilders,” says chief executive Helen Gordon, “particularly on large sites, to help derisk and accelerate schemes by including a phase for PRS.”
Standing stock is just that: standing, with an immediate income stream. When Fizzy Living needed to build up a working portfolio quickly to attract institutional money, it bought standing stock.
Like Grainger, it now has a preference for purpose-built stock, but will not rule out buying more buildings if they can be adapted. “As long as it ticks boxes for the mix and size,” says managing director Harry Downes.
How schemes will be managed is an issue. Incorporating efficiencies of scale in one single building can be difficult. Across broken blocks, with units pepper-potted around, it can eat into income returns.
But it is possible, provided the price is right.
“The recent past has shown us that there has been a strong market for traditional residential investment stock,” says James Wilson, partner in residential investments at Allsop.
“Even large blocks of apartments have found a buyer where a strong case for existing yield performance has been made,” he says.
Allsop acted on the 131-home North Star portfolio, which was bought by Grainger in late 2015 for £10.4m. Grainger also bought the seven-block Oystercatcher portfolio for £11.4m at the beginning of 2016.
Provided management is achievable, and the price is right, investors are still willing to look into portfolio buys.
Diverse disposals
“I think you have two parts to the market,” says Mark Farmer, chief executive at construction consultancy Cast. “There are lots of housebuilder-style portfolios being traded, and investors see no harm in that in terms of rent or yield.” And housing for sale retains the advantage of a simple alternative exit strategy: it can still be sold on the open market.
“General housing stock can offer a diverse investment; it also offers a wider range of buyers for individual units should a unit by unit disposal strategy be preferred,” adds Wilson.
This dual market feeds into valuation methodology and how funds keep assets on books. Institutional investors entering the market have generally been looking for income returns. More opportunistic buyers will be happier to take capital growth into the mix.
Of the IPD 10-year return, three-quarters of that was made up of capital growth. For institutional investors, this means yields are not high enough, hence the focus on purpose-built stock. In this context, large blocks are being geared towards institutional buyers, which prioritise income. Smaller units are still being valued using vacant possession, and thus take capital growth more into account.
In the future, there will be room for both.
• To send feedback, email alex.peace@estatesgazette.com or tweet @EGAlexPeace or @estatesgazette
