Here’s an oddity. It might make an essay question for an A-level in personal finance, if there is such a thing. Given that every other taxi driver claims to have made a fortune in buy-to-let, and that millions are being withdrawn from pension pots to put into supposedly smarter investments in bricks and mortar, why are there so few companies willing to invest in letting residential property?
You can buy a slice of the Shard or a peel of the Gherkin on the stock market, but you will struggle to gain exposure to residential property. There is FTSE250-listed Grainger plc, which owns 4,000 homes, but in a specialised field: old regulated tenancies that produce very low rents but increase sharply in capital value when the tenant eventually leaves. There’s also Unite Group, specialised in student lettings. Apart from those, there are few options for getting your hands on a slice of the residential market without becoming a landlord yourself.
Three years ago the government set out to encourage institutions into the sector by launching a £1 billion Build To Rent fund, giving developers access to taxpayer-guaranteed loans to fund 50 per cent of development costs. This was a year before the Help To Buy scheme offered similarly backed loans to homebuyers. Both schemes are open to the same criticism: why should taxpayers underwrite property investment? Build To Rent is just helping pump up house prices when otherwise they might have fallen to a more affordable level. Frustrated first-time buyers might welcome a greater supply of rental flats, but many would rather have the opportunity to buy a home.
For two years there were few takers for Build To Rent. But that changed sharply last year. According to Savills, £3.5 billion was invested in residential letting properties by businesses and institutions in 2014. That’s equivalent to 10,000 central London flats, but still tiny compared with the money being poured into buy-to-let by private investors, who borrowed £1 billion for that purpose in January alone, according to the Council for Mortgage Lenders. There are also many cash buyers in the market.
Institutional investors in this sector tend to be small and unquoted. There is Fizzy Living (a subsidiary of Thames Valley Housing), which owns four purpose-built blocks in east London and Epsom. Essential Living has eight developments under way in London. Biggest of the private rented sector schemes is East Village, the former athletes’ village for the 2012 Olympics, where a private investment firm, Delancey, owns 1,400 flats.
All are targeting 25-to-35-year-old professionals who are too well off to qualify for social housing yet too poor to buy. Their biggest selling point is being able to offer longer tenancies. Whereas private landlords tend to offer only six or 12 months, standard lengths for an assured shorthold tenancy, rental companies can offer longer tenancies because they are in the investment for the long haul.
You would think there would be huge economies of scale in one company owning and managing large blocks. But this isn’t quite how institutional investors see it, according to Lucian Cook of Savills. ‘Lots of individual tenants place high management demands,’ he says. Moreover, yields are generally lower than in the commercial sector and business has always been more sceptical than amateur investors towards the notion that property prices will gallop endlessly upwards. The temptation for investors is put up a block and then sell it off to wide-eyed buy-to-letters, perhaps holding on to the freehold for a steady stream of ground rent.
In London, it’s the amateurs who were right and the professionals wrong: homeowners have made huge capital returns over the past 20 years. When the masses start to buy something, it doesn’t matter how mad professional investors think they are, their expectation of good returns becomes a self-fulfilling prophecy. The question is, what will it do for the property market if companies start rushing into the private rented sector, building hundreds of new flats for rent? It won’t help buy-to-letters who own grotty basement conversions: if letting becomes more professional, there will be less room for bad amateurs.
On the other hand, if you want to invest in the residential sector, buying shares in a quoted company has a lot of appeal over owning flats directly. Letting property is more like a job than an investment — getting phoned up at midnight because your tenant’s boiler has broken loses its appeal after a while. Moreover, buying a single property means putting a lot of eggs into one basket. If institutional investors do start to dominate buy-to-let, small-time investors may end up happiest with the arrangement. As for the people who will be filling the flats, however, I fear that Built To Rent properties will be just one more thing which helps to price them out of the housing market.