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Residential sector attracting institutional interest

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A survey of 63 institutional and real estate investors reveals a robust appetite for residential property investment, with 62 per cent of those polled planning to invest in the next 12 months and 69 per cent over the next three years.

More than 50 per cent of investors surveyed said they would increase allocations to the residential sector by divesting their holdings in the more traditional real estate sectors, largely to the detriment of the retail sector in the UK and the office sector in continental Europe.
 
The survey carried out by Andrew Taylor, head of residential investment at the pan-European owner-managed real estate investment management business, INTERNOS Global Investors, reveals a preference for the private rented sector (PRS), followed by student housing, hotels, care homes, social housing and shared ownership. This is in contrast to current levels of residential investment which favour hotels, followed by mixed use with PRS in third position and shared ownership coming last. There was significant disparity between demand from UK and European investors for UK shared ownership, with the former showing almost no interest while UK investors couldn’t get enough.
 
Asked about the barriers to investing, respondents highlighted lack of available stock and unappealing returns ahead of other factors including quality of joint venture partners, political risk and planning restrictions. With regard to returns, the majority are looking for core IRRs of 5.0 to 7.5 per cent (ungeard). Interestingly, development risk was not seen as a barrier to entry, which indicates that investors are ready to move further up the risk curve. Indeed, 60 per cent of respondents favoured investing in undeveloped sites with planning permission compared to only 15 per cent that prefer a standing investment with a verified income stream. 48 per cent of speculative investors are looking to invest for the long term.
 
Investors’ attitudes to debt varied between the UK and Europe. In Europe, residential investors appear to have a voracious appetite for debt, with four times the number of investors in Europe using gearing, even at fairly modest levels of between 33 and 50 per cent, compared with the UK and twice the number employing levels of 20 to 33 per cent.
 
Attitudes to social investing indicated that most investors consider key worker housing to be the most socially responsible investment, thereafter allocating priority according to the level of ownership between the state and the individual. However, by ranking traditional owner occupation as being the least benefit to society yet citing it as their favoured exit, seems to put those surveyed at perpetual odds with the guardians of society.
 
When asked about the Right to Buy across the various tenures, investors where 85 per cent against it for PRS, but almost one third in favour of the proposed extension of the Right to Buy legislation that would allow social housing tenants to purchase properties from registered provider landlords. 80 per cent of respondents said that the Help to Buy scheme has opened the opportunity for shared ownership investment products targeted at private individuals.
 
The survey also revealed an overwhelming majority of the respondents demanding the implementation of the one remaining part of the Montague report into institutional investment into PRS from 2012, which is as yet still not adopted by the Government – a dedicated PRS planning class. This is despite it being one of the key catalysts that led to the dramatic take up of the multi-family sector in North America, seeing it being the most popular sector with institutional investors. Second to this was a demand for legislation to force local authorities to release more of their own land for residential development and then an extension of the Permitted Development rights to convert office to residential. At the other end of the scale and gaining overall negative scores were any increases in environmental legislation, greater devolvement of powers to Scotland, or even tighter regulation on PRS landlords, which may force amateur private buy to let landlords to cease and open up greater stock to the professionals.
 
While student accommodation was indicated as a favoured investment, the poll revealed a significant lack of knowledge about the sector which is dominated by a relatively small number of companies.
 
With regard to the care homes sector, the investors were not only particularly cognisant of the risks, especially political risk, but also able to pinpoint accurately likely future demand across individual European countries and appreciate the future investment potential of this residential subsector.

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