Private equity steps up bets on UK rental sector

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Private equity firms and pension funds are betting on UK rental homes, spending record amounts over the past two years amid growing demand and a housing affordability crisis.

According to data from estate agency Savills, contracts to buy or build single-family rental homes totaled £1.5 billion at the end of September, more than three times the amount deployed in the whole of 2021 or 2022. This follows last year’s record of £1.9 billion.

Investors are increasingly favoring single-family homes over large blocks of flats, known as multi-family developments, because they attract more stable, long-term tenants and the homes are easier to build within the UK’s restrictive planning system.

“We believe single family will be the largest mainstream asset class [residential]”, said James Stevens, head of global real estate investments at Aviva, which has invested around $600 million in the sector since 2020.

The share of new rental investment in the UK going into single-family homes rather than multi-family blocks rose to 54 per cent from September to September, up from 32 per cent a year earlier and just 5 per cent in 2019, Savills said.

According to Savills, investors built around 5,000 homes in the first three quarters of the year, up 20 per cent on the same period last year.

UK firms including Aviva, L&G and Lloyds have joined a growing number of international firms. The world’s largest real estate investor bought Blackstone About 4,500 rental houses from Vistry to the end of 2023, in two deals worth £1.4bn.

Blackstone, which has long invested in housing in the US, has built tens of thousands of homes in Europe and is focused on financing new-builds in the UK. The group’s UK residential business has a portfolio of 17,000 affordable homes – and is now also expanding into open market rentals.

The Canada Pension Plan Investment Board (CPPIB) launched a £1bn joint venture with real estate manager Kennedy Wilson in October to invest in single-family homes, with an initial investment of £500mn.

A separate £750mn joint venture was launched in November between private capital manager Graykite and real estate group Gatehouse, which already has a strategy with Carlyle Group. Sigma Capital Group, an early player in the sector, has expanded its portfolio to over 8,500 homes.

Critics see the influx of private capital into rental properties in various countries as an indictment of the housing crisis that has locked many families out of home ownership and left them Long term rental Thanks to big rent hikes.

Institutional investment in rental properties in the UK is at a lower level than in other countries, with large investors owning just 3 per cent of rental properties – compared to 37 per cent in Germany and 41 per cent in the US.

Investors say institutionally-owned rental homes offer more stability and higher quality than homes run by smaller, private landlords – and their plans will boost the overall number of homes built at a time when Housebuilders’ Sales has fallen

“Institutional investment can play an important role in adding new supply while generating stable, inflation-linked returns for end-investors,” said James Seppala, head of European real estate at Blackstone.

Last year, investors could expect a 15 to 20 percent discount on unsold homes from major developers, who faced a slowdown in demand after a “mini” budget hike in lease trusts in 2022.

“A big part of it [deals in 2023 was] Homebuilders are likely struggling to sell their products for sale. A big part of what’s happened this year is that housebuilders are thinking a lot more strategically,” said Piers D Winton, head of national residential investment at Savills.

These concessions have shrunk as developers reduce their output, posing a challenge for investors. Some are acquiring land and contracting with house building firms to supply new properties.

Some private equity managers hope to build large portfolios that they can sell to pension funds, such as fixed income by rental homes. Blackstone closed one of the first such deals, selling 3,000 shared ownership homes worth £405 million to the UK’s largest private pension fund, the Universities Superannuation Scheme.