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Build-to-let expands horizons to professional sector

Posted by Tom Walker in

Student accommodation has been open to public investment for the past two decades but has seen an explosion in the influx of institutional investment in the past few years, with the likes of Singapore's sovereign wealth fund (GIC) and Australia's Macquarie both weighing in to the market. Purpose-built private halls, which offer students exceptional facilities compared to their terrace-house-dwelling contemporaries, continue to rise in towns and cities across the UK as more and more institutional investors jump on the bandwagon in the pursuit of long-term stable returns.

Enticed by the growing demand for rented accommodation, pension funds and other investment funds are now expanding their focus to the mainstream market, particularly in London and the Southeast. According to Savills, a global real estate service provider, large-scale investment in rental property deals increased from £1.6bn in 2012 to £2.5bn in 2013 - a clear indication that the movement towards institutionally provided property for rent in the non-student sector is gaining traction, albeit slowly.

The drivers of excess demand for rented accommodation in the UK are largely two-fold. First-time property buyers face ever-higher barriers onto the property ladder as the rate of increase in property values continues to outstrip the increases in wages. This, coupled with the unabated migration of people into urban areas has only reinforced demand in the rental market. According to The Resolution Foundation's report on 'The State of Living Standards', between 2003 and 2012 the proportion of under-35s on low- to medium-incomes who rented their properties increased from 28% to 49%. The UK think tank also highlighted that the average property in London now costs £437,000, versus £148,000 in the North East.

This growing interest in the private rent provision as an asset class is not the first time that institutions have dipped their toes into the rental market. Rental properties formed part of their investment portfolios up until the 1970s when rent controls were legislated. Margaret Thatcher's government subsequently abolished rent controls, but instead placed great emphasis on home ownership for the electorate. These two key policies combined opened the market up to individual buy-to-let investors, who now dominate the provision of rented accommodation.

Whilst some people believe the move towards this phenomenon of institutionally provided rental accommodation will be slow and drawn-out, most agree that this aspect of the market is not going to go away. Perhaps the Southeast is being driven towards a more Continental-European housing dynamic where life-long rented accommodation is not uncommon. If this were to occur, it certainly would be a dramatic shift away from the UK's historical modus vivendi.

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