U.K. residential property sees strong institutional investment demand, says report

There is a strong institutional investment demand for U.K. residential property, according to Investment Property Forum’s 2017 survey. The research found that allocations to residential property within real estate portfolios continue to increase. U.K. residential investments accounted on average for 8.6 percent of all U.K. real estate assets, the highest percentage since the survey began. The average holding of respondents with exposure to the sector is £432 million ($598 million).

Investment into the private rental sector (PRS) continues to grow in popularity and now accounts for half of total residential investment. Development for either investment stock or for market sales accounts for just under a quarter. The returns profile remains the principal reason for investing in residential, with stability of income the second. Other important criteria are low correlation with other asset classes and the inflation-matching characteristics of U.K. residential.

A key result of the survey shows a total net figure of just over £8 billion ($11 billion) is earmarked for investment in 2018, the majority of which is expected to be channeled into development of investment stock (£4.4 billion - $6.1 billion) and the purchase of existing (and newly completed) residential for private (market) rent (£3.2 billion - $4.4 billion).

Ten of the contributors to the 2017 survey do not invest in U.K. residential, primarily because they see the sector’s pricing as unattractive, income yields as too low for their requirements or are concerned about achieving scale of investment.

More than 70 percent of survey participants use an absolute return target as well, with only two investors using a residential benchmark and, only then, for comparative purposes. In addition, 80 percent of residential investors in the survey intend to increase their exposure to U.K. residential over the next 12 months, compared to 60 percent in the 2016 survey, with three nonresidential investors considering a move into the sector.

Three-quarters of investors intend to work with the U.K. public sector in the next three years to develop housing. Most are looking to create partnerships with the public body supplying the land and the investor building the stock.

“This year’s survey reaffirms what many of us involved in this emerging sector know — that a significant amount of capital is looking to access it, attracted by long-run returns, diversification and significant undersupply particularly at the more affordable price points,” said Stafford Lancaster, investment director, Delancey Real Estates Asset Management and chair of IPF Residential Investment Group. “There remain barriers around viability, achieving scale and management, but the direction of travel is clear and this is good news for the U.K.’s ongoing housing crisis.”

The Investment Property Forum’s sixth annual survey, based on responses from more than 50 institutions and large-scale investors, gives an indication of the appetite for residential property as well as continuing barriers to potential investors. Respondents to the survey own or manage investments worth in excess of £3.5 trillion ($4.8 trillion) of which U.K. real estate comprises £240 billion ($332 billion) (7 percent of all assets).

The full report can be found here.