Why institutional investors are eyeing UK’s private rental sector

One of the driving forces behind institutional investment from the likes of Aviva Investors and Legal & General is the potential scale and value of the PRS — it is worth £1.4tn today, 19 per cent of the UK’s £8tn housing market.

The FTSE 100, by contrast, was valued at £2tn at the start of January 2023. While the popularity of build-to-rent schemes with institutions has grown rapidly in recent years, less than 1 per cent of the UK’s housing market is owned by institutions. This leaves huge potential, which is attractive to institutions seeking long-term, stable investment opportunities. 

The potential for substantial, growing yield (income as a proportion of value) elevates the appeal of the UK PRS. Rental income, which is broadly likened to wages, is reliable due to the necessity of the product — a home. Rental demand is growing due to pressures on the housing market from affordability constraints and population growth. Demographic trends indicate that this growth will continue.

The Office for National Statistics forecasts that the number of households in England will increase by 1.6mn (7.1 per cent) in the 10 years from 2018, to 24.8mn in 2028 from 23.2mn. Growing housing demand and, within that, growth in the proportion of renters, translates to a source of dependable income linked to wage inflation. 

Rental demand is growing due to pressures on the housing market from affordability constraints and population growth

Achievable yields are a product of factors such as location and property type. As a guide to regional variation, today’s PRS offers yields ranging from 3 per cent to 12 per cent for single-occupancy flats and houses, depending on geography: investments in prime locations in London are at the lowest end of the scale; investments in less economically prosperous areas at the upper end.

The range of risk-rewards to different geographies and archetypes facilitates investments across the risk spectrum, from “core” returns in the safest locations to “value add” in riskier geographies.

Ninety-five per cent of the projected population increase is attributable to shrinking household sizes. One-person and multiple-adult households without dependent children, making smaller housing options, which typically generate higher yields, attractive. 

As safe as houses 

The reliability of residential property values contrasts with the volatility of the stock market. For example, the FTSE 100, a trusted diverse source of value, can fall by 30 per cent in a day. Other direct real estate sectors such as offices have fallen in value by 20 per cent in the past year.