UK - Pension funds are interested in investing in UK residential property vehicles if some form of institutional residential investment market can be established, according to the British Property Federation (BPF).

Gareth Lewis, director of finance and investment at the BPF, told IPE Real Estate the professional body is currently investigating how to develop a UK residential property market as an asset class of interest to pension funds, along with the creation of residential Reits, as the group believes there is sufficient interest and this would help to meet the government's own 2020 target for social housing development.

More specifically, Lewis noted the UK residential sector is still one of the few established real markets failing to attract institutional investment because systems are still not in place to secure sufficient liquidity, management and pricing facilities.

"The most striking thing about the residential letting market and the financing and capital is institutional investors haven't gone anywhere near it despite the fact it is an asset class they should have been involved in," said Lewis.

"It has always been seen has high risk because the income has to come through capital gains. It is an owner-occupied dominated market because people are more concerned with where they live rather than the income returns.

"But UK housing is the UK's biggest asset and pension funds don't have any exposure to it. If they are in a position where they have sufficient funds, they should be considering it. They may be reticent because it is mainly driven on capital returns. But the desire is there for pension funds to invest," he continued.

While residential investment has become a part of real estate institutional investment in the US and across some regions of Europe, European pension funds are more likely to sign up to invest in smaller-scale, specialist real estate projects, similar to that seen with the 4% holdings by Dutch pension fund ABP in student accommodation firm Unite.

The UK government released a green paper on housing last month calling for three million more homes to be built by 2020, but in order to achieve this at least 240,000 need to be built each year in the UK by 2016.

But Lewis said in order to achieve this and encourage pension funds to help finance residential property growth, more financial incentives may be needed from the government to encourage European pension funds to make that important first step and invest in the development of social and rental housing.

"There are things which could be done with Reits legislation but a bigger change is needed. It does need the government to do something to help it get into the professional managed sector," continued Lewis.
"We need some sort of government intervention to encourage interest from the buy-to-let market. It is a £150bn market so if you could persuade 10% of the buy-to-let owners to move into a listed vehicle, that would be a significant start.

"The key is how do we have a liquid, professionally-run residential sector, whether it is a Reit or listed company, how do we get that level of scale so institutional investors will be comfortable investing in it," he added.