Londoners forced to rent will fuel boom in apartment investment

With first-time buyers having to borrow more and save longer, leasing demand is set to soar, and investors are building like never before

PUBLISHED : Wednesday, 12 June, 2013, 12:00am
UPDATED : Wednesday, 12 June, 2013, 4:07am

Londoners are increasingly becoming tenants whether they like it or not after the British capital's average home price passed £500,000 (HK$6 million) last month.

With first-time buyers having to borrow more than ever and save longer to afford a down payment, leasing demand is set to soar, and developers and investors are building like never before.

The Greater London Authority estimates households renting privately owned apartments or single-family homes will increase to 37 per cent by 2025 from 25 per cent last year.

"It's one of the most exciting, if not the most exciting asset class in the market today," said Nick Jopling, executive director of Grainger, Britain's largest publicly traded residential landlord. "Institutions are recognising that too."

Investors including Grainger, Dutch pension-fund asset manager APG and developer Quintain Estates & Developments are already seeking to profit, while others, such as New York-based private-equity firm KKR, said they were considering entering the London market. Savills estimates at least 210,000 more households in Britain will seek to rent in the next three years, most in the capital.

Multifamily-home buyers had total returns of 8.9 per cent last year, compared with 2.7 per cent for commercial real estate, Investment Property Databank said. They are also set to benefit from measures introduced by Prime Minister David Cameron's government aimed at stoking construction and reviving the economy.

The government's March budget announcement included £1 billion of incentives aimed at spurring multifamily residential development and easing a housing shortage.

A month after the incentives were introduced, about £700 million had been allocated to 45 projects around Britain. The developments could produce as many as 10,000 homes, the government estimates.

"Those are the seed assets that we will see in future years, acquired by institutional money once they're built, leased up and tenants are paying their rent," Jopling said.

The shift toward companies and investors owning swathes of rental housing is as much cultural as it is economic. Like the rest of Britain, home ownership in London is engrained in the culture. Moving up the so-called housing ladder and renting out an apartment once a new home is acquired, or investing in a few buy-to-let properties, has become a cottage industry. It is different to places like the US and Germany where homeownership rates are lower and companies own thousands of rental apartments.

About 70 per cent of Britons own their own home compared with 53 per cent in Germany, data compiled by LBS Research shows. In the US, it is 65 per cent.

To rent a home to Londoners unable or unwilling to buy one, multifamily investors are focusing on neighbourhoods with access to transport links like the London Underground, such as Paddington, Balham and Putney, which were in the south and southwest, said Adam Challis, head of residential research at broker Jones Lang LaSalle.

"It's all about orientating the asset around the demand profile of future occupiers," Challis said. "Renters typically are going to be young professionals, car free, and as a result transport access is going to be a hallmark of the successful locations."

The Underground's zones two and three, which ring the city centre, were the country's best-performing areas for renting houses and apartments last year with returns of 10.7 per cent, researcher IPD said in February. The average rent in greater London climbed to £1,236 a month in April, up 4.8 per cent from a year earlier, according to an index compiled by HomeLet, the largest referencing and rentals insurance company in Britain.

Quintain, a London-based developer, will rent out 100 flats in building projects in Greenwich and another 100 in the city's Wembley neighbourhood, rather than sell as it had typically done, because of increased demand.

"It's the new phenomenon of this year," Quintain chief executive Max James said. "There is a growing institutional demand for this kind of product, so you begin to see this triangle where developers, tenants and institutions are all coming together in the same space."

APG, Europe's largest pension-fund asset manager with €325 billion (HK$3.3 trillion) under management, teamed with Grainger to buy about 1,200 homes for about £350 million in January.