The affordable homes crisis- institutional investors to the rescue?

Unlocking the planning system to build more new homes is seen by the Government as key to stimulating the UK’s moribund economic growth and helping to solve the housing crisis. But when it comes to the housing crisis it’s not just about increasing supply to close the gap with demand. 

Over the past decades, policy has focused on building homes for sale rather than rent with, for example, Help to Buy, which provided government equity loans and mortgage guarantees. Then there is right-to-buy, a scheme encouraging tenants to buy their social homes, reducing the overall supply of social housing with the building of replacements falling far short of stock sold.  Such policies reflect old attitudes that renting is a second-class tenure. 

But renting in the UK is set to be the dominant form of tenure, with homeownership becoming increasingly out of reach as the average UK house price rises to over 12.5 times the median income for a single earner. Demand for rental homes far exceeds supply with rents soaring relative to incomes: UK rents now take 37% of median incomes and a staggering 48% in London. 

Most UK rental homes are provided by individual buy-to-let investors or small to medium-sized businesses. However, this is changing with taxation policies having hit the ‘accidental landlord’ over the last few years, seeing huge waves of buy-to-let investors put their properties on the market, unable to make their investments stack up. Simultaneously, there has been increasing involvement of institutional investors in the UK private rental sector through build-to-rent homes, homes purpose-built for renters, offering the advantages of professional management, economies of scale to reduce operational costs, and lower maintenance costs. This is attracting UK and overseas capital with for example US private equity giant, Blackstone, recently acquiring 1,750 homes over the summer for private rent.

Initially, since the build-to-rent trend took off in the last decade, most build-to-rent schemes have focused on apartments in city centres that tend to be targeted at young professionals with many offering facilities such as gyms, lounge areas and terraces, and fairly punchy rents.  More recently, there has been a move to the building of single-family homes for rent. So far, build-to-rent has focused on those with upper-middle incomes. But, there is a huge gap in the provision of homes fortenants at middle and lower middle-income levels at an affordable rent, which is up to 30% of income. This covers homes for tenants providing key services, including teachers, nurses and police officers. 

However, uttering the words affordable and regulated rents is usually a sure way to deter private investors from investing in build-to-rent. Dig deeper and there is a lot to like. Studies have shown that some regulated markets have more consistent returns with fewer void periods and longer tenancies than unregulated markets. The question is the level of regulation. Rent rises limited to inflation plus an acceptable level of return will be needed to attract investors while remaining affordable for tenants. Several major institutional funds are investing in affordable build-to-rent homes across Europe, including the UK. Attracting them is the prospect of long-term, secure risk-adjusted returns. 

In the long-term, UK tenure is likely to become more like the US and Germany with a larger private rental sector provided by professional managers backed by institutional investors, housing those on middle incomes. With this market set to mature, now is the time for investors to get involved to not only help secure returns, but also provide part of the solution to the affordable homes crisis.