The nascent UK rental market is attracting institutional investors looking for stable returns and a hedge against inflation.
Lloyds Banking Group PLC leads the indictment and plans in, according to an August report the Financial Times. That could make the London lender’s Citra Living unit the UK’s largest rental company.
The Goldman Sachs Group Inc., Macquarie Group Ltd. and Legal & General Group PLC have also moved into build-to-rent as soaring UK property prices and limited housing stock are driving rental demand. Financial investors could end up owning a third of the nation’s rental portfolio, according to real estate agent Savills, as low interest rates add attractiveness to assets that can generate rising revenues over many years.
“Similar to banks like Lloyds, we really strive for stable cash flows over the long term,” said Dan Batterton, LGIM Real Assets Head of Build-to-Rent, Legal & General. “Ultimately, we want income that we can offset against pension liability, and in the UK rental market, rents are rising over the long term, similar to inflation.” Financial investors currently make up just over 1% of the rental portfolio, Batterton called.
Banks move in
Lloyds aims to reach 10,000 properties by the end of 2025. Lloyds CFO William Chalmers previously said that moving into the rental sector would allow him to build on existing skills in the housing market and that there is potential for the supplemental insurance business. Many banks are looking for alternative forms of income, as they are still under profit pressure from their core business in the lending business due to the low interest rates. Lloyds’ net interest margin for the first half of 2021 was 1.07%, down from 1.33% in 2020.
Australian bank Macquarie Group Ltd. partnered with the founders of a build-to-rent company in early 2021 to create a new vehicle, Goodstone Living, that will “develop, own and operate units on a large scale” and plans to bring £ 1 billion into the sector . The US-based The Goldman Sachs Group Inc. has teamed up with housing management specialist Pitmore to buy nearly 1,000 rental homes in the north-west of England.
The market dynamics increase the opportunity for institutional investors. A nationwide housing shortage has caused UK house prices to rise as fast as they have been in 15 years, up 10% in the year through September, according to Nationwide building society. First-time buyers have had a tough time with mortgage approvals for these buyers down 6% in the year through March, according to Savills.
Meanwhile, private landlords who rented properties through buy-to-let mortgages have exited the market after tax changes made it a less attractive option. More than 180,000 such mortgages have been repaid since the first quarter of 2017, Savills said.
“An enormous amount of capital”
There is “a tremendous amount of capital” chasing the housing market, like that Simon Hampton, Real assets leader and partner at the service company PwC.
For banks, btil-to-rent is a natural protection for mortgage books, said Hampton. In the longer term, if people don’t get up the corporate ladder, mortgage applications will decline, while institutional investors looking to invest money in real estate will have limited choices as they shy away from investing money in offices and especially shopping malls, Hampton called.
Legal & General’s Batterton said more banks are likely to enter the market as well. He found that institutional owners in the US, the Netherlands and Germany have a far larger market share – up to 50%.
But he warned against it Financial investors’ pledge to provide quality housing in a sector notorious for poor quality was critical, and that reputational risk is “significant” as banks associate their brand with building to rent.
L&G, an investment management and insurance company, has more than 5,000 rental apartments in planning, development or operation.
When due, institutional ownership of the rental sector could account for up to a third of the market, or 1.5 million homes, according to Savills.
“Lloyds won’t be the last financial investor to move into build-to-rent,” said Lawrence Bowles, senior research analyst with the real estate group. “The long-term inflation-linked income it offers is exactly what many financial institutions are looking for in a low interest rate environment.”
