What lessons can the UK private rented sector learn from continental Europe?
The following article was written for and first published by REACT News by Andrew Smith, CIO at Hearthstone Investments
https://reactnews.com/article/can-the-uk-learn-from-european-rental-markets/
"As a nation that has long prioritised home ownership, it can be hard to imagine having a private rented sector (PRS) with the same reputation and value as the PRS holds for our European neighbours.
Here, private rental often has a poor reputation, coloured by stories of neglectful landlords and poorly maintained homes, and is viewed by many as a second-rate option to owning the roof over your head. In continental Europe, renting your home is far more commonplace and the PRS has a much better image. Governments have typically developed a more balanced approach to housing policy than in the UK, where the interests of owner occupiers have tended to dominate the agenda.
But with the right backing, we could create a more appealing offering for renters, whether they are those for whom home ownership is not a viable choice, or are renting for the flexibility it offers – and that changes the way we view rented housing in this country.
A new approach to financing
At present, most rented homes in Britain are owned by small buy-to-let landlords. Research by the Investment Property Forum[1] estimated the value of the UK’s PRS at £1,284bn in 2020, of which just £87bn is accounted for by institutional investors. Both totals will have increased since then, and much of this investment has so far been focused on high rise blocks of flats in urban centres.
In continental Europe, institutional investors often play a much bigger role in financing private rented housing. These are typically pension funds, banks and insurers, such as Deka/Sparkassen in Germany, Swiss Life in Switzerland and AXA in France. ‘Living’ sectors, including social housing, have formed a large part of Dutch pension funds for many years.
In fact, figures from JLL show that global investors have more than doubled their residential allocations since 2010[2], with the living /multi-housing sector now accounting for 33% of investment volume. But UK allocations remain low.
For example, among the key transactions in the UK’s PRS sector so far this year was the acquisition of 918 single-family homes by PGIM Real Estate from Goldman Sachs Asset Management. Yet while this is a sizeable deal in UK terms, this pales in comparison to the large portfolio deals seen on the Continent last year, such as Vonovia’s acquisition of Deutsche Wohnen – 155,000 units – for close to €28billion.
Continental Europe is a more mature market and shows how far we can go here in the UK if institutional investors become a more significant force. Over time, we’re likely to see the evolution of a liquid market in high quality tenanted assets, which are currently in short supply. Regular trading of institutional portfolios is a hallmark of a mature market and, based on the evolution of the market in continental Europe, active trading of investment assets and portfolios is likely to change how they are priced.
The focus is likely to shift to the value of the income stream, much like commercial property. Comparisons with owner-occupied property prices will become increasingly irrelevant.
A benefit to residents
As well as providing funds to increase the volume of private rented housing in the UK, institutional investment firms can help improve the quality of housing available to residents.
Too much of the country’s private rented stock is not fit for purpose and too many tenants live with long-term uncertainty over their tenancies. The Government’s Renters’ Reform Bill has promised to address this by fundamentally reforming the PRS and significantly improving the quality of rented housing. While this should contribute to higher standards of management, it does nothing for supply – and may actually reduce choice as some existing owners opt out of the market rather than making the changes needed to comply.
Elsewhere in Europe, Government regulation has certainly had a role to play in creating a strong PRS, but one of the biggest factors that sets their private rental sectors apart from the UK’s is the source of investment behind it.
With a long-term focus and accountability to their investors, institutional investment firms have brands to protect and will want to provide well managed and well-maintained housing, helping to align their interests with those of residents.
And for investors, the UK’s residential market offers a strong opportunity. As research by Cushman & Wakefield’s has shown, the market’s low-risk profile, ability to provide stable income streams and strong capital growth are among the reasons why it’s become increasingly attractive for large investors seeking to diversify their portfolios[3].
And it’s an opportunity that more institutional investors are starting to realise – moving beyond the high-rise BTR projects in the country’s city centres.
Analysis by Knight Frank shows that while Germany remains the largest single market for European residential investment (with 2021 volumes reaching €53 billion), the UK came second (with over €12 billion invested – an increase of 6.6% on 2020 levels). Investment figures in this country remain far lower than Germany’s, but when you account for the smaller percentage of the population renting, it’s certainly a growing market.
The UK PRS market is developing rapidly as an institutional investment sector, and over time seems likely to follow a similar path to maturity seen in other parts of Europe and the US. In doing so, and with apolitical will, it could make a valuable contribution to addressing the housing crisis, offering improved access to good quality, sustainable, well managed and more affordable housing. This also creates an opportunity for long-term investors, seeking to benefit from a sector that offers strong fundamentals, a dependable income stream, and well-accepted diversification benefits."
[1] Investment Property Forum: ‘The size and structure of the UK property market’, January 2022 (totals are end 2020 estimates)
[2] JLL, October 2022
[3] Cushman & Wakefield, MSCI, RCA
