Why Institutional Investors are Taking Another Look at UK Land

Foreign investors – institutional and individual property fund partners – see opportunities in the pent up demand for housing.

Institutional investors from inside and outside the UK are showing signs that the high-demand housing sector in England and Wales offers a significant investment opportunity in UK land and real estate. It seems that if property funds have succeeded in Asia, in other parts of Europe and elsewhere, it should be a no-brainer to invest in a country where a million households are waiting for a place to move.

But it’s a complicated situation. Why is it that institutional investing in residential assets in the UK has lagged until recently? Indeed, institutional investors hold only about 1 per cent of the total residential stock in the country. Compare this to places such as France and Scandinavian countries, where pension funds and insurance companies hold between 10 and 15 per cent of housing.

Some say it has to do with scale, because funds are not typically drawn to smaller developments. But what may change this are government policies relative to housing and an increasing rental market. Larger multi-family construction can yield the asset growth that institutions and larger investment groups are looking for.

Financing in the form of sale-leaseback terms also offers a creative means for institutional investors to participate in housing. For example, M&G Investments purchased 400 properties for rent inside the east London Stratford Halo tower block, which it leases back to the Genesis Housing Association, which will manage it for 35 years as it makes payments to M&G. The investors maintain ownership over a longer-term, including after the end of the leaseback deal. Payments are linked to inflation, part of what makes the deal attractive to the investors.

The institutions may also see how joint venture land investment groups – the smaller pools of individual investors who buy raw land, achieve planning authority changes, build infrastructure and then sell it to homebuilders – are typically achieving healthy asset growth in a short period of time. This may not be the stream of rental income over time that some investors seek, but it can deliver substantial returns in as little as 18 months. A diversified portfolio often has room for this kind of investment.

The fact that Chinese outbound investments are up 80 per cent, year on year, in 2014 suggests there simply is more capital pushing investment – which can be good for the UK. According to numbers reported by real estate company JLL, slowing growth at home in China is pushing money overseas, with global gateway cities such as London among those receiving the most influx of cash. JLL states that while the office sector is a preferred asset class, there is increasing interest in residential development.

This of course comes a few years after investors of all types from the Middle East, Russia and elsewhere discovered that UK residential property – particularly in London, of course – can be a safe haven for their money. With greater familiarity of the UK housing development opportunities, there is increasing private and institutional investment to other parts of England as well.

Institutional investors of course employ analysts and economists to determine where best to put their money. Individual investors should instead work with an independent financial advisor to assess specific investments and to develop an overall portfolio strategy.