Appetite for new investment opportunity confirmed by expressions of interest
10 June 2009
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A new initiative which could see hundreds of millions of pounds worth of new investment into the private rented housing sector has received 64 expressions of interest, the Homes and Communities Agency announced today.
The HCA’s Private Rental Sector Initiative (PRSI) is designed to attract institutional investors, such as UK pension and overseas funds that have not traditionally been involved in residential letting, into the market at scale for the first time. Used to fund the building of new homes specifically for private rent, it could help relieve pressure on the housing market by kickstarting stalled developments, as well as make private rental an option of choice for consumers in the future.
Submissions to the expression of interest process, launched by the HCA last month, have been received from household name UK pension funds and other investors, property developers, fund managers, housing associations and property managers. The HCA and its advisor DTZ are now evaluating the submissions with a view to encouraging organisations to come together to create investment propositions with scale.
Chief executive of the HCA, Sir Bob Kerslake, said: “This response, and the sector’s wider support for our initiative, has validated the early market testing which told us there is an opportunity here to do something different.
“To maintain momentum and make the most of the current favourable market conditions we now intend to move quickly to take these submissions to the next stage, evaluating deliverability and the value for money they offer, and in particular to encouraging parties to come together. We will also step up our work to identify a pipeline of product for investors – homes on HCA schemes and other developments across the country."
'We are still in the early stages of this initiative, but interest has been encouraging and shows the potential it has to ease some of the effects of the market downturn on developers and turn private rental into an option of choice for consumers in the future."
Of the submissions received several strongly meet the HCA core brief, focusing on the capital (investment and fund management) elements of the initiative. The remainder relate to two other relevant components: product – the supply of land and homes; and property management. Several of the submissions received were from consortia, and a number were from overseas institutions.
The HCA and DTZ will now evaluate the submissions based on the outlined approach, including deliverability and value for money, and each organisation’s:
- Financial strength and standing, resources and relevant experience
- Ability to invest and/or raise third party capital
- Capability and track record in the creation of new investment funds
- Willingness to be flexible and innovative
The HCA and its advisors will continue to work with each of the submitting organisations in coming weeks and it is anticipated that many may need to work together, particularly where their submissions are well aligned, to create a focused number of propositions at scale. Given the scale of the interest, there may be a number of funds and more than one fund partner.
The HCA has also confirmed that it has begun an exercise to indentify a potential pipeline of stalled housing schemes ripe for investment. It is also envisaged that there may be some cross-over in terms of identifying potential product for the PRSI, with the Agency’s related initiative to kickstart developments using £400 million of additional public money announced in the Budget.
The Agency expects to announce details of its expressions of interest for the £400 million kickstart fund later this month.
Ends
For more media information contact the HCA press office on 020 7881 1624.
For operational information interested parties should contact Chris Balch at DTZ on 020 3296 4391 / chris.balch@dtz.com.
Notes to editors:
Residential property investment has historically offered capital growth rather than income. This is not attractive for institutional investors who are trying to match investments against liabilities, often pension payments, and hence prefer a steady and reliable income stream. In the current market, on paper, sufficiently high net yields could now be achieved from rental streams without reliance on capital growth. This could produce potential long-term underlying returns to investors equivalent to gilts.
The financial opportunity offered by private rental is the context, rather than the reason, for supporting public sector intervention in the private rental market. Several major policy papers on this subject in the past year from the British Property Federation, the Smith Institute, Joseph Rowntree Foundation, Grainger Trust and review of PRS for the Government by Professor Julie Rugg have all championed the case for a fresh policy approach to private renting. The HCA’s PRSI forms part of the Government’s response to the Rugg Review.
The HCA’s analysis suggests that there are two specific policy reasons for the public sector to now intervene to encourage private rental investors into the market:
- Demand – There is a pressing need to meet the pent-up demand from those people who want a quality home but who may no longer be able or willing to get a mortgage or simply may decide to delay home ownership for many years until the market has recovered fully. For another category of people, renting may be their preferred tenure of choice but the supply of good quality homes in this market is limited. The choice is poor compared with the housing markets in European countries. The potential of a large private rental sector has long been recognised for its role in encouraging labour market flexibility and mobility.
- Stimulating Supply – Private rental investment could help to make ‘mothballed’ mixed-tenure development projects more viable and help maintain capacity in the housebuilding sector. An investor could be willing to pre-purchase whole schemes or parts of schemes, thereby eliminating the speculative nature of house building which so many developers and their lenders can no longer take on their own.
A growing private rental investment market could reduce the short-term financial focus of the UK’s private housing market so that it may start to display some of the long-term ‘asset class’ investment characteristics of commercial property, with property being held and traded for its quality and performance in use. Scale will generate a profile for the fund that, together with the security of income and prospective returns, could attract the previous buy to let type investors but without the ‘bubble’ risk factors.
Type of Vehicle – The aim would be to create an investment vehicle which would attract institutional and private investors. The vehicle which has no other function other than to buy private rental homes from developers and housebuilders, hold the assets for investment purposes. The portfolio of assets would be professionally managed either by RSLs or other professional property management companies.
A private rental vehicle would buy into whole schemes or rental elements within schemes. Large-scale build-to-let elements within projects funded by the Vehicle would allow a range of new pricing mechanisms within blocks and thereby maintain the policy of mixed-tenure communities.
HCA Role – We have considered what role the HCA could or should play to support the private rental market. Our contact with the City suggests that there is the opportunity for the HCA to ask investors and fund managers to come forward with their own investment propositions on the understanding that the HCA may choose to support more than one proposition – an internally or externally managed fund with external investors. The HCA will not be the fund promoter but will provide support in order to develop investors support for what will effectively be a new investment class, similar to the emerging Student Housing market.
The HCA has been speaking to Government and market participants around the concept of a Private Rental Sector Initiative. This informal market testing has indicated that there is a sufficient level of institutional interest, which has been confirmed by the expression of interest process.
The Homes and Communities Agency is the single, national housing and regeneration agency for England.
Our vision is about creating opportunity for people to live in homes they can afford, in places they want to live and for local authorities and communities to deliver the ambition they have for their own areas.
This will be achieved by:
- Acting as the bridge between national targets and local ambitions, with a strong regional presence
- Through a process of 'single conversations' with local authorities, RDAs and sub regional partnerships
- Working effectively with the market, housebuilders, investors and other stakeholders
- Understanding the needs and aspirations of people and communities.
The HCA brings together English Partnerships, investment functions of the Housing Corporation, and the Academy for Sustainable Communities, with major delivery programmes of Communities and Local Government.