In its smallest nutshell, the residential investment sector is the activity of institutions, organisations or individuals investing in housing on a larger scale than just purchasing a single property.
Whilst similar in some ways to the commercial investment sector, the residential sector has its own specific sub-sectors, investment routes, regulations and issues to consider.
Overview
It is the UK’s largest investment class and has been the best performing investment asset over the past thirty years.
According to Savills, the total value of Britain's housing stock passed the £6 trillion marker for the first time in 2015, after gains of £385 billion.
They state that 'residential property has become an increasingly important store of wealth' with total equity now standing at around £4.8 trillion (over 2.7 times the GDP of the UK).
And over the last decade, the total value of the UK's homes has risen by over £1.6 trillion - the largest growth in the past 3 years (£1.2 trillion).
The commercial sector is worth around £871bn (2015)representing 10% of the UK's net wealth according to the British Property Federation (BPF). £483bn of which is held by institutional investors, REITS and companies. To date, institutions have only had a relatively small exposure to residential property.
However, with future housing demand likely to be very high, forthcoming government support for the residential investment market and an increasing wealth of expertise in this area to draw from, larger organisations have every reason to place their money in the residential pot.
Assets in the sector
So, what constitutes the assets within the residential investment sector?
The residential market harbours many different asset classes under its umbrella including market rent, shared ownership, development and sale, ground rents, equity release, purpose-built student housing, HMOs, MUFBs and social housing rent.
These various sub-sectors can offer very different types of return. Market renting, for example, will provide a mix of income and capital returns, whereas shared ownership will offer a different income and capital profile.
Social housing, on the other hand, offers low capital growth but has bond-like features where investors’ rents are directly linked to the retail price index and secure covenants from financially regulated landlords.
Student housing can offer varying risks and returns. The safest option is to contract for occupancy with a higher education provider and get slightly lower returns. Or you could just market the property direct to students – which usually offers the best performance, but with higher risk.
Those wanting strong capital growth can invest in sub-sectors like executive homes or a geographically based fund.
London’s constant demand for quality housing for wealthy foreigners would be attractive to investors who want to invest in strong house price inflation.
Investment performance
While institutional interest has been slight in the residential investment market, it is likely to increase.
An ever-growing population and difficult access to mortgages will ensure that housing demand in the UK will increase in strength, and for the long-term. An ageing population increased immigration and birth rates will bolster our population to a projected 74.3m by 2039.
This means we simply need more dwellings. But as finance for first-time buyers remains hard to obtain – the size of required deposit has more than doubled since 2007, averaging at about £33,000 – attitudes to renting are changing. It seems to be the residential funding option of choice as many feel uncomfortable about buying in an uncertain climate or just can’t afford it.
With house prices dipping in non-city markets, stock will be cheaper to obtain and there are many sources from which a potential investor can gain information on the best investment structure for them.
These include the IPD residential index (www.ipd.com) which can be used to compare long-term performance and asset management cost differentials of the various residential investment options.
There is also Hometrack who provide research and information about the UK housing market and can offer specific advice on localities. They are used by the largest housing associations to inform their business strategies and provide intelligence to many local authorities.
Investors can also approach leading agents, like Savills or Foxtons who have plenty of expertise in all sub-sectors of residential investment, as well planning consultants and lawyers who will know all the legal requirements.
Furthermore, there are an increasing number of registered providers and housing associations with social and market rented sector stock that they own and manage, who are looking to work with private sector investors.
Investment structures
There are many ways to invest in residential property are these include:
REITS (Real Estate Investment Trust): these are UK tax resident companies who are exempt on rental tax and capital gains as long as they have 75% of their income and assets in property renting and a distribution of 90% of their rental income.
PAIF (Property Authorised Investment Fund): basically a more open-ended version of the REIT, it has two types – a non-UCITs retail scheme (NURS) which is open to any type of investor, and a qualified investor scheme (QIS) which is only available to established investors.
Both NURS and QIS must have 60% of their income and assets in property rental and pays interest to investors after 20% withholding.
Unit trusts: Property unit trusts were popular in the UK when Stamp Duty was introduced as they were exempt, but this exclusion was ended in 2004 and now only offshore unit trusts which hold interests in land situated in the UK are beyond the reach of this dreaded tax.
Property companies: simple UK property companies are still a popular investment vehicle, especially if trading is high. Many are considering converting to REIT status in order to gain the tax exemptions and access to a wider market.
Though the routes into residential property investment and the sectors on offer are a myriad, with varying legalities and levels of risk and return, it is clear that the sector as a whole is an attractive platform from which to build an investment portfolio and the future looks bright for those who want to get onboard.
