I recently wrote a piece for Property Week magazine about the residential rental market in the UK. You can read it below…
Here are six reasons why residential is a good investment:
1) Over the last 100 years (or any long term period), the return on investment on residential property has been better than any other asset class including commercial property, equity or bonds.
2) Holding a portfolio of residential property persifies risk as each asset is relatively small. E.g. Urban Splash has in excess of 700 residential properties across our portfolio, less risky than one single big office tenant.
3) Individual, professional tenants (or customers as we like to call them) provide good covenants,which are checked with sophisticated credit checks. And even in hard times, people will make sacrifices in other areas to ensure that they can pay the rent. It’s ironic that student housing is relatively easy to fund but the underlying covenants are much weaker than tenants in employment.
4) The fundamental equation of supply and demand is very positive. The population is growing at a fast rate whereas house building is at its lowest since the 1920’s. More households are being created, but less homes being built.
5) Residential properties have long lives if they’re well maintained and little in built obsolescence. It’s hard to imagine the value of a 30 year old student housing block, supermarket or data centre not depreciating and requiring substantial remodelling but good quality residential property will last indefinitely.
6) Tenant demand is high. Factors such as high employment mobility, continued restrictions in the mortgage market plus the high transaction cost of buying (stamp duty, etc) encourages rentals. It takes the Urban Splash rentals team on average of just six days to re let a property and our mature portfolio is 97% full.
So if I’m right and it’s such a great investment why have we not seen more investment into residential property in the UK?
I believe this is why:
1) The legal structure surrounding landlords and tenants has only been in place since the Housing Act of 1988 - before that it was virtually impossible to let residential properties on a commercial basis. It’s an immature industry.
2) It’s a ‘mum and pop’ industry. Typical landlords own one or a handful of properties managed by a third party agents, some good, some bad - many indifferent - giving rise to tales of bad experiences. Tenants don’t know how long they’ll be able to stay for and often even who owns their property. It’s not very professional and is very much like the student housing industry of 20 years ago before the likes of Unite professionalised it.
3) To succeed you need a passion about customer service. Customer service and management is more intensive in residential property than commercial but no more intensive than a number of other industries such as hotels, retail, nursing homes, etc.
4) There’s a perceived reputation risk in so far as you’re dealing with peoples’ houses. This simply requires really good management.
5) There’s a lack of trusted brands in the market and Urban Splash are trying to create a trusted residential brand. When people rent an apartment from us we are the landlord, the building manager, the customer service contact…
6) The yield is low, anywhere between 3 and 10% gross and you do need to allow realistically 30% to cover landlord service charge and management costs, but historically it has proved to still be the best hedge against inflation of any other asset class.
I hope that the fundamentals are so strong that the tide is turning and, as we’ve seen institutional investment increase in student housing, we’ll see it in the private rented sector too. I hope that Urban Splash can play a part in this which in time will release capital to build more much needed homes.Filed under: Tom Bloxham MBE, Urban Splash 1 Comment