News analysis: Institutional investors size up UK housing
Institutional investors size up the market as government incentives increase the risk of a bubble, writes Richard Lowe.
Patrizia Immobilien announced the appointment of UK residential expert Andrew Pratt this week. The Augsburg-headquartered company has a long track record in the German – and other Continental European – housing markets, and so the move looks to be a logical step in its ongoing expansion in Europe. Pratt will join Patrizia’s new UK business, established through the acquisition of Tamar Capital earlier this year.
However, the UK residential sector – fragmented and lacking the necessary scale for institutional investment – is a very different prospect to the German multi-family market. The latter is a staple investment of German pension funds, while residential ownership by UK institutions has long been uncommon.
There are signs this is changing. The two biggest votes of confidence took place this year – M&G Real Estate’s £105m (€123.5m) acquisition of a 534-asset housing portfolio from the Berkeley Group, and APG’s deal with Grainger to own a share of a £350m housing portfolio.
More recently, APG announced it would provide debt financing to London residential projects and UK student housing developments through LaSalle Investment Management. This week, Aviva Investors revealed it would provide funding for affordable homes for its social housing fund.
But, again, the latter two examples are very different to traditional multi-family investments. It will be interesting to see the approach Patrizia takes. Back in May, prior to the appointment of Pratt, Marcus Cieleback, head of research at Patrizia, told IP Real Estate’s annual investor seminar in London that Patrizia’s traditional investors were “used to buying in large apartment blocks that make management very efficient”. He added: “If you look at the UK market, you’re lacking this. You might have larger buildings, but they are more for the private buy-to-let market, and then you have some of them that are more or less affordable housing, which is not really the sector our investors want to go into.”
Details aside, most will agree the fundamental supply/demand imbalance in UK housing has to create investment opportunities.
A company in a position to capitalise on this imbalance is Lands Improvement Holdings (LIH), which acquires land with a view to rendering it viable for residential development. LIH, owned by an opportunistic real estate fund managed by MGPA (now BlackRock), has achieved a 24% internal rate of return on 32 realised assets over the past 11 years.
Since the financial crisis, the number of housing starts has “fallen off a cliff”, according to Kevin Moriarty, managing director at LIH. His company manages 16 active development sites; if it were to make a noticeable impact on the new-housing deficit in the UK, which politicians are desperate to reduce, the company would need to operate at three or four times this volume. Now is the time to be investing, Moriarty says.
The UK government recently launched its Help to Buy scheme, which allows first-time buyers to pay a deposit of just 5% and take out an equity loan from the government for as much as 20% of the property’s value. The scheme is reserved for new-build properties. Figures from the Home Builders Federation (HBF) show 4,000 people have already reserved a new home in the two months since the scheme was launched.
But there are concerns the scheme, which in future will include government-guaranteed mortgages, could create a mini bubble in the new-build market. Moriarty concedes this is a concern, particularly since most of the UK’s house builders have scaled back their businesses during the downturn and so might not have the capacity to meet the demand being stoked by the scheme.
Ben Habib, chief executive at First Property, acknowledges the government incentives are dangerous “because you run the risk of creating a bubble in the properties they’re supporting”. But, he adds, “perhaps we need a little bubble in order to defray the debt levels … as long as that bubble doesn’t then rapidly deflate and people’s earnings follow suit.”
According to Lucian Cook, head of UK residential at Savills, “the prospects of a mini-boom in the housing market have been overstated”. Research from Savills suggests Help to Buy and another government scheme – Funding for Lending – could result in 156,000 additional housing transactions by 2015-16. Commenting on the research, Cook said: “The conditions that apply to Help to Buy combined with existing affordability constraints are likely to temper any upward pressure on house prices.”