Pension fund billions set to target private sector rental market

A major report due out next week is expected to call for a shake up in the financing of house building to encourage City investors, insurers and pension funds to invest in affordable homes.

All good as an aspiration according to City investor Andrew Allen who is head of global property research at Aberdeen Asset Management and who invests on behalf of pension funds. But the role of asset managers is to put company and local authority pension fund cash into long term, safe investments with reliable income returns. And it is untapped UK private sector residential that is going to be the big winner in terms of investments in the current housing shortage, he says.

"The market could be worth many billions of pounds within the coming years and is a huge parallel opportunity to the standard ‘build to sell’ residential model" 

“The huge mismatch of demand over supply is one of the most significant property stories of our times, and offers huge opportunity to construction companies and property investors alike,” he says. “In essence a whole new industry will be developed to meet the burgeoning demand of a new rental class.”

The usually highly sophisticated UK global property market is a distinctly undeveloped investment market for residential property, but this is on the cusp of change, Allen says.  A typical US pension fund may have around 20 to 25% of their property investments in the private rented residential sector. In the UK it is a tenth of that.

Critically the UK private rented sector has not yet adopted standards seen overseas and it needs to Allen says. “In the US we typically see professionally managed ‘multi-family’ blocks of rented property being designed with the renter in mind. Such flats are purpose built for the needs of the renter and a specialist set of management disciplines has grown up to support this industry. There is considerable opportunity for the construction industry to supply such scale investors with high quality residential product fit for rent.”

Aberdeen Asset Management is a global asset management company listed on the London Stock Exchange; it is a FTSE 100 member.  It has assets under management of £193.6bn of which property accounts for some £15.2bn.  In the UK the property team comprises over 80 staff managing over £4bn of investments out of offices in Edinburgh and London, in the last two years the team has transacted over £1.2bn of investments.   As at March 2014 the Aberdeen UK property business has clients currently seeking to deploy between £500m and £1 bn into the UK property markets.

The market,” he says “could be worth many billions of pounds within the coming years and is a huge parallel opportunity to the standard ‘build to sell’ residential model that construction companies have known for decades.”

Institutional fund managers are looking to such investment, he says, because the mismatch of supply and demand implies that there are strong prospective returns particularly when compared to many commercial property sectors.

The UK economy may only just be coming out of recession but the large-scale, institutional property investment market has been buoyant for many months. “This may have been overlooked by the major construction companies as a source of investment monies,” he suggests.  The resurgence of investor demand for UK property drove the total returns (of capital growth and income return) to some 4.4% in the last quarter of 2013 the highest return since late 2010; only two quarters in the last seven years have shown higher returns.

 “This year has continued in a similar fashion with a considerable weight of capital seeking a home in the UK property markets from both within the UK and from international investors. This is creating a new challenge for institutional investors that are increasingly struggling to find good value amongst the major UK property markets.

“As a consequence there is raised interest in the regions, smaller markets, emerging property sectors and lesser quality properties.

“Strong competition for existing, income producing product is increasingly leading investors towards having greater confidence with regard to supporting construction programmes by being willing to forward commit or forward fund a new development; but largely such investors are leaving the development risk with specialist construction companies. 

“The opportunity for construction companies to supply into this market should be self evident.”


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