Legal & General announced its first investment in the UK Private Rental Sector (PRS) market last week and now plans to become a major owner of rented accommodation. The financial services company sees residential property as an ideal new institutional asset class for long term investors, and has an appetite to invest up to £1bn in the sector.
Legal & General Capital (LGC), the principal investment division of the Group, has acquired an initial £25m regeneration site at Walthamstow in London to build and rent over 300 flats. The accommodation will be a range of 1, 2, and 3 bedroom flats.
On completion the rent from the flats will provide an attractive long-term institutional investment return. By investing in projects such as Walthamstow, Legal & General can access a supply of PRS assets and achieve a better match to long-term annuity liabilities than its existing fixed income assets currently provide, allowing it to enhance returns across the Group, and provide real economic growth for the UK by creating much needed new housing.
Commenting on entering PRS market, Laura Mason, director of investments at Legal & General Capital said: "The UK has a chronic shortage of housing. (The) investment and our future plans for the PRS sector should help address the structural issues which have contributed to the shortage. We view investments over 30 or more years and are using our long term capital to change the way the UK housing market is financed. This will be the first of many PRS deals for LGC."
Bill Hughes, MD of Legal & General Property, added: "We consider PRS to be a key part of solving the housing supply crisis. It is essential to us that we focus on purpose-built 'build to rent' investments of scale that are capable of delivering management efficiency and a high standard of customer experience."
In addition to entering the PRS market, Legal & General already build homes to sell; arrange mortgages; provide finance for affordable homes; care homes and key worker accommodation and build-to-lease student accommodation. The Walthamstow PRS development will be built and managed by Legal & General Property, on behalf of LGC.
However, one financial services firm pumping £1bn into the purpose built PRS sector is nowhere near enough according to Paul Winstanley, partner of residential valuations at Allsop, who was speaking at the British Property Federation's (BPF) residential conference in early-February. He said that more than one million new households are needed due to population growth and immigration and that most of that will be in PRS.
Allsop, he said, estimates that £177bn of investment in the residential sector is needed between now and 2020 - or £35bn a year. "Housebuilders, however, don't build for supply, they build for profit - it's not in their shareholders interest to do so," he said.
Speaking at the same conference, David Cowans, chief executive of Places for People, which manages rental properties for the Greater Manchester Pension Fund (GMPF), reportedly said local authority pension funds have "a role to play in PRS", but few had stepped into the sector. Coles added that hurdles needed to be overcome to make PRS a viable sector for institutional investors - notably by improving the scale of product. "But the message is that all main political parties want institutional investment in PRS," he said.
According to the BPF, the English Housing Survey figures show that the private rented sector remains the second largest tenure in England and households aged 25-34 were more likely to be renting privately than buying their own home (over 50%). The proportion in this age group living in the private rented sector has more than doubled from 21% in 2003-04. Over the same 10 years, owner occupation in this age group dropped from 59% to 36%.
The BPF believes that an institutionally funded build to rent sector is the most effective way in which to significantly increase the volume and standard of private rented sector accommodation in the UK.
The 2013-14 English Housing Survey showed that 19% (4.4m) of households were renting privately, compared to 17% (3.9m) households renting social housing and 63% (14.3m) owner occupiers. This is up from 18% in 2012-13 and 11% in 2003.
Melanie Leech, chief executive at the BPF, said: "The UK is facing an acute housing crisis, and at the same time we are seeing a significant change in the way in which the population is living. The build to rent sector is an obvious solution to this. Not only does it offer steady and attractive yields for institutional investors, but it will also provide high-quality, much-needed accommodation for those who are unable to step on to the housing ladder."
However, while Allsops estimates £35bn per year of investment is needed in the PRS over the next five years estimates over the longer term are even higher. According to a recent forecast by Landbay, £1.4trn needs to be invested in UK housing over the next 20 years, equivalent to £70bn per year.
