Hamptons International interviewed seven leading banks and pension funds based in the UK, Continental Europe and the USA and found the biggest barrier to residential investment was target gross yields assumed to be between 4.5% and 5% compared with the 5.5 % to 6% associated with commercial property.
It found the only way to attract institutional investors into the residential property market would be to focus on build to let.
This would allow 100% private rented blocks to be built efficiently and at scale offering higher net yields as well as the ability to acquire a large number of units in a single transaction, the firm argued.
And it said government must encourage the sector to grow by focusing on how this type of building will be treated by the planning process, providing clarity on how build to let proposals will be handled in terms of S106 requirements for affordable housing.
The report also revealed that institutional investors rely on an income-generating model rather than a model based on capital growth - making the yield a more important investment driver.
Interviewees agreed a residential fund would need a minimum of £500m in assets under management to achieve the necessary economies of scale to make the investment worthwhile.
One interviewee said: “Residential can only be an opportunistic play unless the yield improves. It just isn’t core without a reasonable income stream.”
The report said investors believe that there is an insufficient volume of existing and appropriate residential stock available to achieve the necessary scale.
This belief was based on the misfit between the largest investment deal done in recent years – the purchase of the Terrace Hill portfolio of 574 units by Akelius for £75m – and the perception that an institutional-grade residential fund would need a minimum of 2,500 properties.
It was for this reason build to let was considered the way to encourage investment.
Adam Challis, head of research at Hamptons International, said: “The results of this report are a clear message to government that if it wants to see institutions invest in the residential market, it needs to make build to let a viable option for investors.
“The ability to create modern, efficient and bespoke private rented buildings constructed at scale without the burden of restricted planning policies will have a fundamental and positive impact on institutional investment in residential property.”
