The Homes and Communities Agency has been trying to drum up interest from institutional investors to buy into the private rented sector for some time. Aviva Investors and Aegon Asset Management have already shown their interest, and this week LaSalle Investment Management, Savills and Grosvenor also came forward.Could news from the Investment Property Databank that the sector provided more than three times the returns of commercial encourage more to follow?
IPD’s latest residential index, published last week (17 April, p39), revealed that investment-grade, market-let residential property delivered an 11% return in 2009, compared with 3.5% for all commercial property and just 1% for offices (see graph).
In fact, residential has outperformed its commercial property counterpart since 2000.
Mark Weedon, head of UK residential services at IPD, says: “Residential, market-let investment has consistently rewarded investors with greater returns than commercial property since 2000, despite lower income returns.
“Its long-term performance represents a hedge against inflation and volatility, while maintaining impressive performance.”
Better performance
Rob Weaver, head of residential at Invista Real Estate Investment Management, adds: “The results confirm something we all know and cannot hide from – residential property has outperformed commercial property over the short, medium and long terms. It has the greatest performance for the lowest risk, and you can’t get away from that.”
Invista had come close to setting up a residential fund itself in 2007, but abandoned the plan for structural reasons.
According to IPD, the residential total return index experienced growth of 135% from 2000 to 2009 – double the 68% returned to investors in commercial property.
Its figures – which track the performance of portfolios owned by Grosvenor, the Crown Estate, Grainger, the Church Commissioners and Cadogan Estates among others – show that, over 50 years, real house prices have risen by 274%, against a 55% drop in real commercial property values.
And it is for these reasons that Aegon and its partner, Terrace Hill, are launching a £300m private rented fund, and why Aviva, with CB Richard Ellis and Seattle-based residential management firm Pinnacle, announced plans last July to launch a £1bn fund.
Aviva is understood to be just weeks away from announcing its first private rented acquisitions for the fund.
However, some remain unconvinced about the sector and feel that commercial property, without residential’s management issues and perceived low income, offers investors a safer return.
Legal & General Property, after unveiling plans to launch a £1bn fund to invest in the private rented residential sector in early 2009, has now decided to cancel the initiative.
Managing director Bill Hughes says: “As one of the UK’s largest institutional property managers, we have a wide exposure to all areas of the real estate sector and, on behalf of our client base, are always looking to explore all opportunities that present themselves.
“We have always been very supportive of government initiatives for the private rented sector and, while we are not at present engaged in any plans, we do not rule out the possibility of involvement in the future.”
A research paper, published by analyst RAB Capital this week, also backed the commercial sector rather than the residential market.
It claims that the outperformance by the residential market has been skewed as it has been shielded from the full force of the recession, unlike the commercial property sector.
RAB says that UK residential and commercial returns should be much more evenly matched.
It says: “Commercial property is financed and refinanced by long-term loans. Since 2006, this financing has been extremely scarce and expensive. In contrast, residential mortgages tend to have variable interest rates which have automatically plummeted in line with the base rate without any refinancing needed.”
RAB argues that, looking ahead, the residential market is in greater danger than the commercial sector as it believes that the recent support for house prices will disappear once interest rates start to edge up.
So, while residential may look like a smart bet on paper, many mainstream investors seem to believe that commercial property continues to be safer than houses.
