UK Housing Sector Offers a Variety of Opportunities for Investors

With the 2008 property bubble burst sufficiently in the past, the demand for housing – particularly rental – provides new means to grow income and assets. 

There is increasing interest on the part of investors in housing in the UK. This is evident in statements from a multi-asset manager at Henderson Global Investors to a personal finance columnist at The Telegraph. Noting that property funds now yield about 4.5 per cent, surpassing gilts and corporate bonds, he said, “It’s a valuation story. If you look a the cost compared to the income you can get, property looks compelling.”

Portfolio managers at other multi-asset funds concur, and the Telegraph columnist (Emma Wall) notes that property can be an inflation hedge, given how rents tend to track with the price increases of other goods. Still other real asset investing advisors see growth in homebuilders and building material manufacturers, as well as lenders that specialize in buy-to-let mortgages.

As an asset class – and the property bubble burst of the past five years notwithstanding – residential property over the past three decades has been one of the best performer for investors. While this traditionally was an investment that largely benefitted individuals – small- and large-scale property investors and developers – institutional investors have historically stayed away from housing. That is, until more recently, when key economic factors including population growth and low-prices on distressed properties, came into play. Also, residential housing has generally been a capital growth strategy and less one that produces income; however, with a growing renter class that scenario has become more attractive.

All factors considered, there remain several key investment opportunities for the broad range of investors, from individuals to institutional players:

• Single property investments – While largely the province of the individual, buy-to-let has traditionally been a means for property-inclined investors who are willing to manage the physical property, leasing and such. Government programs continue to support this type of investor.

• University to-let housing – It is hard to argue with 99 per cent occupancy, as is the case in student accommodations in UK university settings. What is particularly attractive about this category is how the Higher Education Statistics Agency reports that more than 300,000 non-domicile students were at UK universities in 2012, part of a steady annual rise of about 1.5 per cent per annum.

• Funds related to housing – Real estate investment trusts (REITs) in commercial properties are part of the story, although they have performed poorly in the volatile swings of market traded securities where valuation is more a function of external (market) factors than the performance of the property itself. But those are stabilising and with the launch of the UK’s first residential REIT in early 2013 – notably focused on student housing – investors are looking at this as a new type of real asset fund.

• Strategic land – Land investment funds are typically managed by capital growth partners who are skilled in site selection, acquisition, zoning change processes and infrastructure development. They will assemble groups of investors (typically, the price of entry is £10,000 or more) who then can track the development of a single property, which is then parcelled and sold to homebuilders who construct the residences and sell them to buyers. The time frame for delivery ranges from two to five years in most scenarios.

While some investors are sceptical about the Help to Buy and Funding for Lending schemes, both in terms of effectiveness (a weak push on demand) or the opposite, creating a new real estate bubble, most concur that the fundamental factors are in line to make real estate investing a good play as part of a diversified portfolio.

“Prime real estate is finite and still very much in demand,” said one advisor-investor to The Telegraph, adding “the weakness of sterling continues to make it attractive.” But almost all investment advisors caution that an independent financial advisor should be consulted before investing in land or any other asset – the risks and rewards should be considered in relation to one’s complete financial portfolio.

Understanding Property Funds

A property fund allows investors to participate in real estate opportunities with the added benefit of diversification.

With greater awareness of the opportunities present in the current real estate market, many investors are looking carefully at property funds. The volatility of traditional investments, especially publicly traded stocks and bonds, drives interest and investment in various forms of real estate and property investment instruments.

A property fund allows the investor to diversify – and minimise risk – by buying multiple properties that are appropriately vetted (before acquisition) and managed (after acquisition) by skilled property fund managers. This differs from individual investors who are sole owners of single or multiple parcels of land. The lone investor may face headwinds from external factors, such as change-of-use resistance or an adverse change in local economics, whereas a property fund will strive to avoid such situations. While the nature of land will always be subject to externalities, the diversified nature of property funds leaves the investor with proportionately less exposure.

An alternative to a property fund is a REIT (real estate investment trust) fund; however, the two have key differences. A REIT is more liquid – an advantage to some investors and a disadvantage to others. But this also tends to subject the investor to market volatility, something avoided by a trust fund. REIT funds incur management fees that are generally greater than those found with property funds.

Property Fund Partners and their Role in Land Investment

The investor looking to take advantage of real estate opportunities is wise to find property fund partners to manage his or her risk.

The uncertainties and risks associated with all investments – publicly traded stocks and bonds as well as alternative investments such as hedge funds and real assets (real estate, for example) – require all investors to work with trusted and competent advisors. Nowhere is this more important than when investing in land. Variability between real estate choices compels the investor in most instances to work with property fund partners who know how to mitigate risk and maximise returns. These partners will work with its own in-house team of experts as well as strategic partners across the market.

The confident lone investor may be someone with an education and career experience in land and land development. But the vast majority of investors choose to work through a diversified portfolio fund, where the smart acquisition and management of multiple parcels of property limit their exposure. The fund or funds they select are only as strong as the expertise and skills of the land fund managers.

It is those skills that enable the property fund partners to succeed for their client-fund participants. They identify where the maximum asset returns can be found and what optimal external factors are present. Externalities include local development and planning schemes, trends within a local economy and competing properties in the district. Fund managers also assemble a portfolio of properties with a variety of characteristics that will take advantage of a variety of market conditions – again, to mitigate exposure.

Add to this the fact that investors have their own set of tax strategies that can be affected by land investing and it's clear that property fund partners play a vital role in creating a holistically profitable asset for the investor.

Joint Venture Land Opportunities in the UK

The joint venture land opportunity of today is to anticipate where post-recession growth will increase demand for housing and businesses.

Land investors – especially those interested in investing in strategic land – are currently focused on the UK, where a chronic shortage of housing means demand for land is high – and growing.

Global and local economic forces, in combination, are making joint venture land opportunity investing a particularly compelling scenario for investors.

Let us analyse how that works and its consequences. To the land investor, the depressed price of real estate caused by the worldwide economic downturn is a distinct factor – and opportunity. An economic recovery could well unleash demand for housing and commercial construction, which would consequently increase the price of land with relative speed. In some jurisdictions, the desire to attract residents and businesses creates a willingness to enact a change of use on key parcels of land.

Investors who are wary of the exposure from “going it alone” instead use joint ventures to purchase, manage and resell land. This enables the purchase of larger and perhaps more strategic tracts of property, often without borrowing money. A joint venture will also corral the talents of specialists in real estate acquisition, development and management who provide an important bridge between financiers and real property. That expertise can allow the partnership to focus on the most profitable part of the land development process: acquiring sites that have been identified to come forward for residential or mixed-use development but do not yet have detailed plans or permissions.

More investors see such JV arrangements as enabling them to achieve a balanced, diversified portfolio. Real estate has historically performed well and is in fact the source of wealth creation for a large proportion of individuals of high net worth. Current market conditions are thought to provide a rare opportunity for rapid valuation increase.