Report confirms that total PRS returns are significantly higher than for commercial property
LONDON: 21 MAY 2013
Making Sense of Large-Scale Residential Investment by Professor Michael Ball, University of Reading and Member of the International Centre for Housing and Urban Economics, highlights the untapped potential of large scale private residential rental development in the UK. Residential property is the largest single asset class in the UK with a value of over £1trillion and yet has comparatively small institutional holdings.
The report has been commissioned by Get Living London, the new residential owner and rental management company of joint venture partners Delancey and Qatari Diar Real Estate Development Company. It highlights that:
- Total UK residential property investment returns are over a third higher than for commercial property over the ten year period to end of 2012
- UK residential property returns over the last 30 years are also higher than for commercial property and demonstrate less volatility
- Long-run prices for residential property in the UK trend strongly upwards, which cannot be said for commercial property
- Residential rents follow changes in house prices but with additional ‘stickiness’ resulting in predictable and consistent income growth
- The dramatic shortage in homes, notably in London, will see sustained growth in both capital values and income growth meaning that residential property represents a strong institutional investment strategy
- The core rental market in Londonis growing as the capital continues to attract people to its greater career opportunities
- There is a shortage of private rented schemes that have the scale to attract institutional investment
Professor Ball has conducted in-depth research into the residential rental investment market in the UK, looking at historic trend data and challenging some of the considered norms of the sector.
Central to his report is changing the belief that residential property is not suitable for institutional investment. The report’s research has shown that while historic understanding of the residential property market led investors to believe that the majority of the return was from the capital, in fact there are significant gains from rental growth.
In addition, there are other factors to support long-term investment in residential rental property over commercial property. Notably the core dynamic of commercial property is for occupiers to want less space as technology and innovation allows them to operate more efficiently. In contrast, as incomes rise, people want more space in their homes and are willing to pay for it.
Further to this, commercial buildings suffer from depreciation as fashion and tastes change – the report calculates this at nearly 1% per year in rental decreases. This is not true for residential property, the requirements of a home have not fundamentally changed and residential property can easily be adapted. The desirability of neighbourhoods persists over long periods of time as supply is constrained in Britain.
Traditionally, residential property has been viewed as very management intensive with significant associated costs. However, the rise of owner mangers operating at scale negates these costs as they can be spread over a larger number of properties. It is critical to note that a high standard of service offer is important to reduce turnover of tenants.
Get Living London, who commissioned the report, is the new residential owner and rental management company that is creating London’s newest neighbourhood at East Village, the first legacy neighbourhood from the 2012 London Olympic and Paralympic Games. Get Living London will be offering a choice of 1, 2 and 3 bedroom apartments as well as 3 and 4 bedroom townhouses, designed by 16 of the world’s leading architects and offering spacious open-plan layouts, large balconies and winter gardens.
Professor Michael Ball commented, “Both long-run trends and future predictions for private rental residential sectors show that, in the UK, there is a strong case for significant large scale investment to deliver attractive returns. At East Village, Get Living London has the added benefit of no development risk as the neighbourhood has been constructed and will shortly be ready to rent.”
Derek Gorman, Chief Executive of Get Living London added, “This report clearly shows a robust rationale for large scale investment in residential property. With Get Living London we aim to be the market leader in private rental in London and at East Village we have the most exciting new neighbourhood in London. These factors, combined with the market conditions outlined in this report and our commitment to delivering a customer-centric service, demonstrate that Get Living London is in a strong position to meet the growing need for a quality private rental offering.”
Copies of the report are available to download at:www.getlivinglondon.com/residentialinvestment
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