New European REIT Rules May Encourage Institutional Investors into Private Rental Sector

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According to London-based global property consultancy firm Knight Frank, the private rented sector is booming in the UK. Current mortgage finance difficulties coupled with a longer-term lack of housing stock is leading to pent-up demand for housing which is not being met in the sales market. Interest among institutional investors in this sector has been a topic of discussion for years, but now the sector could be on the cusp of significant change.

The perceived hurdles to institutional investment can be overcome, and the new REIT rules which will come into force this summer could be a 'game-changer' in the medium term, according to Knight Frank's Residential Investment 2012 report, published today.

The report, which has also been submitted as evidence to Adrian Montague's Government review of how to encourage greater investment in privately rented properties, explains how the perceived obstacles to institutional investment in the sector, namely stock, management and returns, can be addressed.  The firm's Residential Investment team, headed by James Mannix, also outlines a new potential model for London 'build-to-let' investment.

James Mannix, Knight Frank Head of Residential Investment tells World Property Channel, "A major issue for institutional investors is that the rental landscape in London, and other urban centers, does not yet provide an effective investment vehicle. Much of the existing stock has been designed for sale: apartment buildings in the best areas - where rents can be high enough to satisfy return thresholds - require significant capital outlay, which works to bring yields back down.

"Our 'ideal' PRS property for fund investment would have between 500 and 2000 units, most of which would be designed for solo living, with concentrated floorplates; the block will have provision for other services - including a hotel-like concierge offering a 'menu' of add-ons such as laundry and room service, a basement with individual storage units, and large lifts for easy moving of furniture. Most of the units would be let on standard ASTs, although there would be a collection of short-term apartments for the commuter or pied-a-terre tenant.

"To make the model work, there would also need to be a rethink of the traditional valuation process for rental stock - one similar to student property assessment might be viable."

Knight Frank report also forecasts that while the increased need for property will keep demand high,  rental growth may slow this year as tenants bump up against a natural 'affordability ceiling'. However it foresees that rents will resume stronger growth from 2013. The report also includes a snapshot of current yields that investors can expect across London.