'Modest tweaks' could allow pension funds to invest in UK residential
UK - Three property industry bodies have told the UK government "modest tweaks" to existing legislation could lift barriers to institutional investment in the UK residential market, citing a survey conducted by the Investment Property Forum (IPF) that revealed more than 50% of pension funds and insurers plan to invest in the private rented sector within the next three years.
In a submission as part of the government-commissioned Montague Review, the British Property Federation (BPF), the Association of Real Estate Funds and the IPF said the government needed to encourage large-scale rental projects and treat private sector rented accommodation as 'affordable' (low-income) housing.
In a letter to the commission, directors of the three organisations said: "We consider build-to-let is the only way to significantly increase the supply of private rented housing, given that the current development market is dominated by the requirements of the owner/occupier sector."
An agreement that all units in a development would be rented for a 10-year minimum period meant pension schemes and other investors could justify the economics of what was, after all, a low-yield investment.
"It is quite possible that such stock will be rented for much longer, but institutions will need the assurance of potential sales value into the owner/occupied market to provide an exit value to justify the investment," the submission's authors said.
Despite low volatility and residential's potential to match their liabilities, pension funds were deterred from investing by the absence of a built-to-let option in the planning regime.
Other deterrents included investors' inability to buy sizeable portfolios and the need for intensive management that could not be carried out in-house.
But, said the signatories, "it should not take much to start a bandwagon effect, given the reluctance of most institutions to be pioneers".
The letter, which also received broad support from the Royal Institution of Chartered Surveyors (RICS), welcomed government consultation on new rules that will allow the formation of residential REITs later this year.
However, the signatories urged the government to clarify the definition of 'trading' within the new legislation to reassure investors it would not jeopardise their REIT status.
The submission said: "The success of these new rules for residential investors depends on a range of factors - most significantly, the need to create potential residential REITs from scratch.
"There are some signs that such vehicles will be promoted, but there are significant challenges because it is extremely difficult to attract capital for a blind pool REIT without a compelling track record."
The BPF is represented on the review commission's expert reference group, along with Universities Superannuation Scheme head of property Graham Burnett.