Retirement giants become homeowners as rental construction grows

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e that in 2012, when the Olympic Village was converted into rental housing, rental construction programs in the UK were non-existent. The market has since grown and will soon represent a fifth of the new construction sector as institutions seek new sources of income.

In the second quarter of this year alone, more than £ 550million was invested in rental building programs across the UK, according to Savills. There are now over 62,000 completed. When you factor in those currently under construction, that figure rises to 200,000.

Dan Batterton, rental construction manager at Legal & General Investment Management (LGIM), said that number was still tiny compared to the overall rental market of nearly 4.5 million households, however.

He predicts a long march of consolidation, given the continued search for attractive sources of income among pension funds and the fifth of small owners considering selling as a result of tax changes.

LGIM has 6,500 apartments already built, under development or under construction, of which 2,000 are currently occupied. A major brake on investment currently is a development risk, which will be lifted as the buildings are completed.

Batterton said: “UK investors are slower to invest in the industry because they really want long-term stable income, but for that you need the asset and the build. There are very few built assets to sell and most of the people who build don’t want to sell.

“At the end of the day, we want to have stable long-term cash flow, but we have to develop it first. This is considered high risk because things can go wrong during this phase.

Few UK institutions have the knowledge or appetite to take development risks, Batterton added. LGIM only buys land with planning permission and partners with well-known entrepreneurs such as Visria.

This has left room for construction specialists such as Macquarie, who recently launched Goodstone Living, and plans to invest more than £ 1 billion in the UK rental construction industry.

The market is also specializing, with Lloyds using the knowledge gained from its nearly £ 300 billion mortgage portfolio to become a major buyer of completed homes.

ESG in focus

The residential market is widely seen as a defensive sector. But, in addition to the attractive income that comes with construction-for-rental projects, Batterton says the residential sector can potentially have a positive impact as well, which can be an appeal to investors looking to invest in line with ESG criteria.


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