Private equity funds increase investment in UK rental sector

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

Transactions to buy or build single-family rental properties exceeded 1.5 billion by the end of September, according to data from estate agent Savills. This is more than three times higher than the total transaction volume for all of 2021 or 2022. This follows last year when 1.9 billion transactions were recorded.

Investors are increasingly preferring single-family homes over large apartment blocks, known as multi-family developments, in the hope of attracting more stable long-term tenants and because it is easier to build homes within Britain's restrictive planning system.

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

In the UK, the proportion of new rental investment in single-family homes rather than multi-family homes reached 54% in the year to September, compared with 32% the previous year and just 5% in 2019, Savills said. .

Investors bought nearly 5,000 homes in the first three quarters of this year, a 20% increase on the same period last year, according to Savills.

A growing number of international companies have joined British institutions, including Aviva, L&G and Lloyds. Blackstone, the world's largest real estate investor, has purchased about 4,500 rental homes from Beastly starting in late 2023 in two transactions worth $1.4 billion.

Blackstone, which has long been investing in housing in the United States, swept up tens of thousands of homes in Europe and focused on financing new construction in the United Kingdom. The group's UK residential business has a portfolio of 17,000 affordable homes and is currently expanding its open market rentals.

Last October, the Canada Pension Plan Investment Board (CPPIB) established a $1 billion joint venture with real estate manager Kennedy Wilson to invest in single-family homes, with an initial investment of $500 million.

A separate $750 million joint venture was launched last November between private capital manager Greykite and real estate group Gatehouse. Gatehouse already has a strategy in place with Carlyle Group. Sigma Capital Group, an early player in the space, has expanded its portfolio to more than 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 forced many families to stop owning their homes, leaving them to rent for longer due to large rent increases.

Institutional investment in rental properties in the UK is low compared to other countries, with just 3% of rental properties owned by large investors, compared to 37% in Germany and 41% in the US.

Investors say institutionally-owned rental properties have greater stability and higher standards than those managed by smaller private landlords, and they plan to increase the overall number of homes built at a time when sales from housebuilders are falling.

James Seppala, head of European real estate at Blackstone, said institutional investment could play a key role in adding new supply while generating stable inflation-linked returns for end investors.

Last year, investors could expect discounts of 15 to 20 per cent on unsold homes from large developers, which have faced sluggish demand since Liz Truss' mini-budget for 2022 hiked mortgage rates.

big portion [deals in 2023 was] Home builders are probably having a hard time selling their products. Piers de Winton, national head of residential investments at Savills, said much of what has happened this year is that housebuilders are thinking much more strategically.

As developers cut back on production, those discounts narrowed, creating a challenge for investors. Some are also buying land and contracting house building companies to deliver new properties.

Some private equity fund managers are hoping to build large portfolios that they can sell to pension funds, such as the steady income generated from rental properties. Blackstone has closed one of its first deals, selling 3,000 shared ownership homes worth $405 million to the Universities Superannuation Scheme, the UK's largest private pension fund.

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