For institutional investors seeking stable, long-term returns, the UK residential real estate market is attracting growing interest as an important part of their portfolios. The reasons for its appeal are manifold, from the acute housing shortfall, and a regulatory landscape geared around accelerating housebuilding and streamlining planning, to an overall strong capital growth outlook.
As investors actively target opportunities in the UK residential property market, where the flow of institutional capital has historically been lower than in continental Europe, finding the right opportunities can be challenging. A sector that is relatively nascent in the UK but gaining considerable momentum and seeing increasing institutional appetite, is single family housing (SFH). Knight Frank estimates that the market trebled in size between 2018 and 2023 alone, before investment volumes reached record heights of £1.9 billion, and its accelerated growth trajectory is set to continue. Demonstrating the potential for this asset class, institutional investors in the UK own less than 0.5% of single family rental homes, compared to 5% in the US.
The SFH sector offers a compelling proposition and has several advantages over the multi-family segment in the UK. While multi-family has its place, and indeed is the asset class that institutional investors are more familiar with, it carries lengthy development times and requires a more concentrated allocation of capital given the low availability of existing stock in the UK. Single family schemes, on the other hand, a staple of UK housing, have shorter lead times, longer tenant rental periods (lower churn), and lower operating costs as there are no common areas or interconnected services. Crucially, SFH projects offer the potential for greater portfolio scalability, diversification, and significantly more flexibility from a portfolio management perspective.
When it comes to accessing the UK SFH residential sector at scale, current investment strategies often fall short. The majority of investors opt for a forward fund model; however, this can be limited by the cyclical nature of the market and the (lack of) availability of assets that developers are prepared to sell. Alternative, innovative solutions are needed, and this is where the rent-to-own model is emerging as an attractive, highly scalable open market single family investment strategy. It provides the option to acquire assets throughout the cycle, building portfolios at scale within a multitude of locations.
In addition, it's a model that helps drive positive impact through socially responsible investment – by improving the overall quality and energy efficiency of residential stock, contributing to solving the housing crisis and, last but not least, helping people into home ownership. It can particularly support the ‘squeezed middle’, so called because they are unable to save for a deposit on a property yet are not eligible for government grants.
While other strategies designed to spur UK homeownership, like the shared ownership scheme, are certainly beneficial, they bring their own challenges. Few tenants manage to staircase to 100% ownership, in turn affecting the attractiveness for institutional investment as assets are not fully owned. Options such as rent-to-own reverse that, by providing a clear path to homeownership and saving a deposit, and the impact can be far-reaching.
We believe that the prioritisation of investment models that offer a win-win scenario for all parties involved have the best chance of success. In the case of rent-to-own, investors benefit from a ‘clean’ portfolio as well as de-risked access to the scalability and competitive returns on offer within a fast-growing residential sub-sector. For housebuilders it offers access to a new group of customers, people with lack of a deposit for an outright purchase, thereby hopefully increasing their ability to sell units. Lastly, for individuals it allows to rent “their” home while saving for a sufficient deposit to eventually buy it.
It's an approach that can ease future pressure on affordable or social housing, too, allowing people to grow their wealth for retirement, and acting as a catalyst for the delivery of more housing stock. It can support the decarbonisation of the built environment by focusing on greener homes that will lead to future savings on utility bills.
Viewing residential investments through this more holistic lens feeds into the rise of impact investment funds in Europe, with the UK among the leaders, targeting positive local outcomes and responding to public pressure for responsible investing.
With demand only growing in the UK residential real estate sector, it is possible for institutional investors to enter the SFH market by combining private rental opportunities with investing into helping people become homeowners, without sacrificing any of the financial upside. In fact, investors stand to benefit from a favourable risk profile and compelling returns while boosting the real economy and creating positive social and environmental impact for future generations.
This article was first published by funds europe.