RISKY BUSINESS
The potential long-term rewards have tempted pension money back into a market that is littered with risks and barriers to growth.
The biggest potential problem would be if a rent cap was reintroduced. Then there is securing planning permission and finding land, for which competition is fierce, especially from build-to-sell developers.
Other issues include finding expertise in what is a relatively new sector for institutions “There is not a huge talent pool of people with experience of it [residential],” says Greaves, who has 17-year track record in the sector.
Then there is leasing risk. An empty property does not pay members benefits. Unlike in the commercial sector where investors can secure their assets against leases lasting for years, the residential market has a much short average.
LaSalle’s Chris Fry puts the average tenant stay in the sector at around 18 months. To avoid assets lying empty LaSalle looks for projects with diverse income streams, which means only backing projects that have at least 100 units.
It is the same story for Invesco Real Estate, which needs scale to ensure that sufficient rent role is generated to cover on-site costs and pay its clients’ members. In regional areas rents are lower, but staffing costs are about the same, so Invesco will not commit to a project that seeks to add less than 200 units to the country’s housing stock outside of the capital.
M&G looks for schemes with income streams of between £1.5m to £2m. Rents in Manchester are lower than those in Marylebone, so in London it looks for projects with between 125 to 150 flats and at least 200 in the regions.
“Once you have a stabailised asset you have a highly diversified income stream and are not at risk of individual major lease events and expiries as you are in the commercial market,” Fry says.
A vibrant residential rental property development market has many beneficiaries. The government gets the housing stock needed to meet the demand from a rising population. Renters get the option of living in modern properties on flexible terms and institutions could collect the regular cashflows needed to pay their members.
One such fund that is expanding its interests in this market is the Lancashire Pension Fund, which is now backing a 154-apartment scheme in East London.
So don’t expect the history books to log this market as little more than just a trend as housing is establishing itself as a new institutional asset class.
