Â鶹ӳ»­

The joint venture between Legal & General Capital (LGC) and Dutch pension fund manager PGGM to build 3,000 new homes to let is the latest attempt to grow institutional capital on the stony ground of the UK private rental sector.

The ‘build to rent’ partnership aims to bring PGGM’s expertise as an institutional investor to the fragmented UK market, with an initial investment of £600 mln (€790 mln). Mathieu Elshout, investment director real estate at PGGM, described it as ‘the perfect long-term real estate investment, as it provides relatively high income security and diversification relative to other sectors.’

The first development schemes are expected to deliver 650 homes in Bristol, Salford in Greater Manchester and the London suburb of Walthamstow. Elshout told PropertyEU that the homes were being built to rent rather than sell, despite strong price growth in parts of the UK. ‘The strategy is "develop-to-hold" for the longer term,' he said. 'We will be developing good quality in core markets where we expect above average economic growth.

'We are witnessing a continuing supply/demand imbalance at the moment which makes it attractive to invest now, together with more awareness and willingness by the government and local authorities to work with us.'

PGGM is a co-operative Dutch pension fund service provider with approximately 700,000 members and €183 bn of assets under management. LGC is the main investment division of UK insurance group Legal & General, which is responsible for investing £728 bn worldwide on behalf of investors, policyholders and shareholders.

Underdeveloped
At first glance the UK private rental sector is an attractive prospect for investors with large capital reserves. The market is underdeveloped and fragmented, with a high proportion of small private landlords renting out one or two-bedroom ‘buy-to-let’ apartments. But until now the response from investors has been modest.

Demand for rented housing has grown as sustained price growth has delayed the age at which people buy their first home. In 1995 the average first-time buyer was 28 years old; by 2015 that had risen to 31 as the average house price increased by 300% over the same period.

At the same time there has been a slump in housebuilding in the last decade. According to figures compiled by the National Housing Federation 974,000 new homes were needed between 2011 and 2014 but only 47% of these were built.

‘The UK rental market, compared to the US and Europe, is dysfunctional, with ever increasing rents and increasingly poor accommodation,’ said Paul Stanworth, managing director of LGC. ‘For this to change, and renting to become more affordable, we need to invest in the new, and build new homes to rent, and just stop inflating the prices of old housing stock. At Legal & General we’re going to play our part by disrupting the market, and invest significant sums of long-term institutional money to build new rental housing, and develop a UK institutional rental market.’

Institutional market
Last July PricewaterhouseCoopers published a report predicting that the private rental sector will account for nearly a quarter of UK households by 2025, a total of 7.2 million properties, compared to 5.4 million presently.

The UK government has seen the creation of an institutional market as a key development in solving the country’s housebuilding shortfall.

Back in 2009 the Homes & Communities Agency announced the Private Rental Sector Initiative (PRSI), which aimed to create a ‘market driven proposition’ to attract investors. Three years later the government announced the Build to Rent scheme, with a goal of investing £700 mln in 45 newbuild projects. But in 2014 it emerged that only 17 of the developments were still live.

Other entrants
LGC and PGGM’s joint venture is one of several signs that the protracted efforts to attract more investment may finally be bearing fruit. Last week Royal Bank of Scotland announced it had committed £1 bn of capital to support the development of purpose-built private rental schemes over the next 18 months.

Last May German developer Patrizia bought the 20-acre First Street site in Manchester and announced plans to build 500 apartments. It was the first such project in the UK for Patrizia, which manages 80,000 apartments in Europe with a total value of around €7 bn.

JLL said in a report in 2014 that the PRSI was starting to generate tangible results in the form of increased investment, with nearly £5 bn directed at the sector. ‘There is a significant wall of money seeking UK residential assets, with more coming forward every day,’ said Tom Henry, head of residential investment.

'We are at the start of the process,' Elshout told PropertyEU. 'More institutional players are starting to invest in this market, professionalising the sector.

'With the current housing crisis in England, the authorities are becoming aware of the fact that they can play a role in stimulating new developments to try to end this crisis; they can stimulate by fiscal means or enable developers to get access to sites where they want to build. That is helping us to take the kind of steps we want to take.'

Recently the UK government has begun removing many of the incentives for private buy-to-let investors. From April second home buyers will have to pay a 3% stamp duty surcharge and mortgage tax relief will be capped at 20%, effectively halving the rate for higher-rate taxpayers.

The Bank of England sees the proliferation of buy-to-let landlords as a risk to financial stability because the affordability tests for their mortgages are less stringent than for owner-occupiers. That leaves them more vulnerable to a rise in interest rates or falling incomes.

Responsible investing
If the buy-to-let market diminishes, as anticipated, that should create the space for institutional investors such as PGGM to establish themselves in the private rented sector.

The Dutch pension fund and LPC describe their partnership as a ‘different approach in addressing the UK housing crisis’. ‘This partnership allows us to build and own good quality residential assets in the UK at scale, with a high degree of control over our investments,’ said Elshout.

‘As a responsible investor we believe that we have an obligation to contribute to a sustainable world. We can do so via impact investment, or investing in solutions, as we call it. This partnership not only addresses the supply/demand imbalance, it also aims to improve the UK’s built environment, acting as a catalyst for wider urban regeneration and creating rental stock in sustainable urban schemes centred on key transport hubs.’