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The Homes and Communities Agency has attempted to kickstart the market for institutional investment in private rented property. Last week it asked for expressions of interest from organisations interested in a fund investing in the sector.

There have been attempts to draw big investors into residential property before but these schemes have not mushroomed in the way that was hoped. So what criteria must the fund meet in order to do well?

Investors want to get a decent yield and return for the level of risk they take; to get that return, funds need finance. But where would this come from? Banks today would say they are already exposed on residential property. To lend against it, they would need covenants guaranteeing a level of rental income. How can the industry provide those covenants? One way is for the HCA to underwrite a percentage of the anticipated rental income. Another, used in the US, is for insurers to assure a portion of the rents.

I think the HCA proposal will attract investors like pension funds, that will accept lower yields for lower risks

 

The other big issue is the exit strategy for investors. They want to know they can sell their investment and buy something else. Historically, there hasn’t been a common valuation appraisal tool for rental residential assets. But banks now lend based on expected rental income rather than the value of property. If banks, developers, investors and the HCA can come up with a common rental income valuation model then investors can buy and sell with confidence on a transparent and accepted basis, albeit with a risk that there won’t be buyers for the fund unless the valuation model is properly understood.

The investment landscape has changed in ways that could benefit the HCA’s fund. Investors do not currently have many other assets bringing in a stable income. Residential property has also been seen as a vehicle for capital growth rather than rental income, but this is changing. In the past there has been a culture in Britain of seeing renting as a stop-gap tenure but there is now a serious housing shortage to be tackled and renting could play a part in doing just that.

I think the HCA proposal will attract investors like pension funds, that will accept lower yields for lower risks. There are quite a few such funds with cash that cannot find enough places to invest it so there is a unique opportunity now to make this work. But the chance may be gone if we wait two or three years when other markets have recovered.