The case for residential investment: income, impact and resilience

Partner Content: Emma Gullifer from Columbia Threadneedle discusses the options for pension funds looking to invest in residential property including the Build-to-Rent market.

Photo: Shutterstock

Institutional investors, and particularly pension funds, are increasingly aware of the benefits of investing in residential property to provide additional diversification and resilience to their portfolios. Rents that typically track inflation, providing a degree of protection in a higher inflationary environment, income resilience supported by the strength and depth of demand, and the significant potential to deliver impact as well as financial returns, all create a compelling investment case. However, with a wide range of different residential investment styles and affordable housing types available, choosing the right strategy can seem a challenge.

The sector is becoming more nuanced due to the wide spectrum of opportunities on offer within residential property; from highly regulated government-subsidised social housing to building premium private rental units or the offering of alternative non-bank sources of debt to homeowners and housing associations. With such a range of strategies, investors need to be aware of the risk/return profiles available, and the market drivers behind projected returns.

The same is true of assessing the impact of investment in housing. Arguably, with the UK’s demand/supply imbalance, any investment creating new housing has a positive impact; however, investors are now more aware of the need for additionality, and for their investments to be generating positive change within a wider community, in addition to simply increasing available stock.

Build-to-Rent

One example of the trend towards investments that offer both financial return and positive impact, is the growth of investment into affordable Build-to-Rent (BTR). Historically the BTR sector in the UK has been primarily focused on the premium end of the market, creating large prime apartment blocks with a range of amenities and services designed to attract high rents. However, the case for more affordable, mass-market options in this sector is much more compelling.

Firstly, the breadth of demand for affordable rental products is much wider, supported by an occupier base of low- to middle-income working households currently reliant on the unregulated private rented sector for their housing needs. This demographic represents the height of the bell curve of the UK’s population, and yet they are squeezed out of home ownership by unaffordable prices and rising interest rates, while equally not being eligible for social housing.

Distribution of UK households

Furthermore, the available supply of good quality rental housing is reducing. Buy-to-let landlords have been selling off assets to take advantage of rising house prices against a backdrop of increased costs and reduced tax benefits, and with around 23% of available rental stock below decent homes standard. BTR, and particularly mass-market, affordable BTR, still only represents a small proportion of the UK’s rental housing, with a much lower market penetration than in Europe and North America. This demonstrates that there is considerable scope for growth and for institutional investors in affordable BTR to benefit from this growth potential.

Delivering impact

Investing in affordable BTR does not just offer robust financial returns, there is a real case for delivering impact to local communities as well. The target occupier base of low- to middle-income working households is currently an underserved market, solely reliant on a private rented sector that often does not offer a decent standard of housing, nor sufficient security of tenure for their housing needs. With increased investment and development into affordable, purpose-built and institutionally managed rental housing, these households will have access to better quality options, crucially, still at an affordable price point.

Affordable BTR can incorporate discounted market rent units across a scheme, offering further affordability to the local community; however, these units are delivered without government subsidy. This not only creates additionality over both existing affordable housing stock and those that would be delivered under local planning policy, but also ensures that private capital is not in direct competition with housing associations and other organisations delivering social housing stock, avoiding the risk that competing for such sites, for example those under s106 agreements, drives the prices up for social sector and not-for-profit organisations.

Another factor that attracts investor to this sub-sector is that with no government subsidy, the exposure to government policy risk is much lower than investing in social housing. The income derived from affordable BTR is simply based on the widely diversified covenants of working households, rather than being reliant on government grant and/or housing benefit, which can be subject to funding and policy change.

The maturing of the UK residential investment sector is opening up an increasingly wider offer for institutional investors, with a greater understanding that impact does not necessarily just mean investing in government-backed housing. By considering carefully their investment aims and looking “under the bonnet” of different investment strategies, pension schemes and their advisers can help to ensure that a chosen strategy fully meets both their risk/return profile, as well as delivering positive impact within local communities.

Emma Gullifer is a fund manager at Columbia Threadneedle.

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