UK Residential Property
EisnerAmper’s Trends Watch is a weekly entry in our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you would like to be featured, please contact Elana Margulies-Snyderman.
This week, Elana speaks with Simon Hookway, CEO and CIO, MSS Capital.
What are your prospects for investing in residential property in the UK?
Our view is that the UK residential property market has a problem with the affordability of home ownership, and it has been brewing for over 40 years. Essentially, the UK has not built enough residential accommodation for our growing population. This has led to housing shortages in key areas of the city which have seen the greatest influx of people wanting to live, work and socialise. As a result, house prices and inflation have far exceeded the growth rate of real incomes. Young people in particular are excluded from this market and increasingly need to rent.
That being said, what is often overlooked is that younger people of this generation are culturally more willing to rent. The nature of work over the past 40 years has fundamentally changed, and this younger generation expects and needs to be far more economically and geographically mobile than previous generations.
As development space is limited in the UK and planning permissions remain prohibitively stringent, the focus is on using technology to identify sound, fit-for-purpose investment opportunities. risk to acquire high-yielding residential assets. We believe the application of technology is also key to finding poorly priced residential assets across the UK in gentrifying urban and suburban areas to acquire as part of a diversified property portfolio.
Where do you see the biggest opportunities and why?
Knight Frank, a property consultancy, values the UK’s total residential housing stock at around £7.5 trillion, of which nearly £1.5 trillion is currently in the private rental sector. This is primarily owned by private owners, most of whom are referred to as “no-portfolio” owners – those who own three or fewer properties.
This has produced a market that has not been particularly professional nor subject to rigorous institutional standards and regulations. The UK government has been very keen to see this change and has placed a heavier regulatory burden on non-portfolio private landlords to own rental property as their tax liability is now considerable. As you start to see these portfolioless landlords withdrawing to the fringes of UK private rental space, this creates a great opportunity for professional and institutional landlords to replace these outgoing private landlords to fill the void and respond to growing demand from tenants.
These institutional landlords – typically real estate fund managers – can then create and scale professionally managed rental property portfolios, which provide tenants with an overall improved rental experience by bypassing the highly fragmented private landlord market. We foresee a further strengthening of the regulatory landscape for tenants and landlords in the UK in the coming years which will professionalise the rental market, lead to improved standards and provide a better rental experience for tenants.
Investors using strategies focused on residential real estate will be very well positioned to benefit from a vaccine-driven recovery as we learn to adapt to life with COVID-19. The UK government can now focus on the immense opportunities created by Brexit within the economy that the property sector can take advantage of. In addition, the operation of rentals and residential real estate investments also provides a natural hedge against inflation; as investors become increasingly concerned with the structural rather than transitory inflation of the economy, they will naturally want to seek out investments that can hedge their portfolio’s exposure to inflationary pressures.
The outlook for the UK economy is strong as we emerge from the latest global setback caused by the Omicron variant. IMF growth projections for GDP indicate that the UK is expected to grow by 4.7% in 2022, faster than any other developed economy. Additionally, Savills, one of the world’s largest property brokerage firms, recently reported that UK rent growth is expected to increase by 17% by 2025, the highest annual rent growth of 4, 5% expected to occur in 2022. This is good news for institutional lessors involved in the private rental sector, as these institutional rental portfolios are supported by stable cash flows, low volatility and attractive risk-return profiles. Indeed, these factors will help ensure growing demand from income-seeking investors and those wishing to take advantage of the trend of capital appreciation following the pandemic-induced price review phase.
What are the biggest challenges you face and why?
For our property development arm, uncertainty remains as to the actual impact Brexit will have on immigration and its effect on supply chains within the property market. Over the years the construction industry in the UK has benefited from the employment of migrant labor as drivers and builders of heavy goods vehicles, so it remains to be seen what policies the UK government will put in place. place to support this sector of the UK economy. At the same time, tighter supply chains coupled with rising inflation have driven building material prices higher, disrupting development projects and squeezing margins. Despite the disruptions caused by Brexit and the COVID-19 pandemic, vacancy rates have been relatively low while portfolio rental receipts have remained strong. The last 12 months of trading have demonstrated the need for a resilient business model and a prudent approach to management.
We continue to monitor rising inflation and other economic factors impacting our development activities, while there remains uncertainty around the Bank of England’s hawkish stance on interest rates to manage the current inflationary pressure. We expect interest rates to rise further in the year ahead and have therefore taken steps to mitigate the portfolio’s exposure to rate hikes by locking in a new fixed credit facility. This should allow the portfolio to apply additional leverage without significantly increasing the cost of borrowing.
What keeps you up at night?
Not one thing in particular. Ensuring we partner with investors who take a long-term view and allocate patient capital to us as an operating partner is key to our scalability. Equity market volatility and the unattractive yield profiles of fixed income securities are increasingly pushing investors to diversify their exposures to alternative investments, and real assets provide both the necessary income generation and a natural hedge against inflation. Liquidity management remains a concern for many investors; However, it should be noted that residential property is the most liquid part of the UK property market and with growing demographic trends towards renting, we see continued growth in the UK’s private rental sector.
The policy focus on the housing shortage should remain a priority for the government, which is why we are keen to further clarify the tax treatment of property developers seeking to redevelop brownfields into new rental housing and deploy capital in new such projects as circumstances permit.
The views and opinions expressed above are those of the interviewee only and do not/are not intended to reflect the views of EisnerAmper.