Lessons from the US: the way forward for UK ‘beds for rent’ sector lies in a blended investment approach

The UK’s emerging ‘living’ sectors are more similar than they are different, while the US example is insightful but not a perfect road map. For the UK sector to blossom, a blended approach is needed, argues Investec Structured Finance.

The global report by Investec Structured Property Finance – named Future Living: How global investors will transform UK beds for rent – Investec’s Mark Bladon says it is time to stop putting residential real estate into silos and to pursue the idea that there are commonalities across all rental segments.

A multi-class approach to the ‘beds for rent’ sector is evolving in the UK, with growing institutional interest and strong market fundamentals, but the sector needs has a way to go still.

Mark Bladon, head of living at Investec Structured Property Finance, explains:

“If investors are to adopt the ‘Living’ solution in the UK, they must first acknowledge the factors that differentiate the UK from the US. Our research shows that seven in 10 investors believe it could take 10 years or more before the UK real estate market displays the same characteristics as the US.”

Lessons from the US

Across the Atlantic, institutional investors encompass multiple asset classes within a single investment portfolio. They’ve benefited from strong institutional holdings, as well as favourable demographics and lifestyle preferences.

Within Investec’s Future Living report, Simon Scott, lead director, Living Capital Markets at JLL, says:

“There are similar dynamics across these ‘beds for rent’ categories in both the UK and the US. At least as far as huge demand is concerned. Providing or enhancing supply to the market is all about variety. Relying solely on house builders for traditional flats or housing units is not the way to go for this growing institutional demand.”

“In the UK, however, there are challenges that explain why we are lagging behind. Available land for institutions to build to the desired scale is scarce in the UK, and the market has been more conducive to an individual buy-to-let landlord model, where a private individual will have a comparatively small portfolio.

“In other cases, an investor might possess a portfolio of disparate units scattered around different markets that generate a large proportion of the rental stock. All this is in contrast to the US, where stock already exists and where private residential for rent has long been an institutional segment.”

The case for a multi-class investment solution is well proven in the US. Investec’s survey of global institutional investors showed agreement that the popularity of a multi-class rental category, and a blended approach to a structured portfolio, looks set to increase in the UK.

Around nine in 10 believe investment strategies that encompass student, private rented sector (PRS) and retirement living will be common in the UK within the next five years, and 85% believe there will be greater synchronicity between these segments.  So, what’s next for the UK?

Mark Bladon, head of living at Investec Structured Property Finance, explains:

“In our view, the approach most likely to benefit institutional investors is an alternative to the US model whereby two or more use classes lend themselves in the long term to be incorporated within an overarching investment strategy.

“According to our research, investors believe residential rental yields will coalesce within the next five years. The extent of this convergence rests on identifying a strategy that plays to the strengths of each individual asset class – and finding the ‘perfect blend’.

“In the UK we’re at a different point in the curve. We’ve always been a nation of homeowners. But the market has become more supportive of institutional capital and now looks closer to fully facilitating a blended investment strategy.”

james.wallace@realassetmedia.com