UK institutions hunt residential real estate investment

Copyright: David Lawson- Property Week 1999

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Big investors remain committed to the residential market, despite new evidence that  amateur landlords are dragging down  rents.

 Schroders still plans  to launch its groundbreaking unit trust this autumn, after dismissing the buy-to-let boom as a 'flawed, short-term phenomena.' London & Henley, a subsidiary of US giant Security Capital, also remains on course to create a portfolio of 5,000 flats after spending 60m pounds this summer.

 The RICS warned last week that the rented sector faces 'a difficult few months' after surveyors around the country reported falling yields and rents as private investors flooded the market with property. Hamptons International also noted in its Lettings Journal  that central London rents had stagnated and voids were increasing.

   'There is an oversupply due to the success of the buy-to-let scheme,' said RICS spokesman Ian Perry, partly blaming low mortgage rates encouraging renters to buy instead.

  But  fund managers and their advisers have shrugged off the trend, which has been developing right through the summer. 'We are getting no reduction in calls from institutional investors looking for a way into the market,' says Nick Jopling, director of Allsops Residential Investment Management.

  William Hill, managing director of Schroder Property Investment Management, said the buy-to-let boom would have 'no significant impact' on plans to launch a residential unit trust which could own more than 500m pounds worth of property within five years. Other players such as ING and Charterhouse are also understood to remain committed to increasing investment.

  'You will see other names coming into the market before the year is out,' says Jopling. Hill adds that buy-to-let has been a fundamentally flawed phenomena because investors have acted as if they were buying for themselves, taking on cosy suburban semis. 'This is not where the letting market is rooted in depth,' he says.

 Buying individual properties scattered around the country also means they cannot take advantage of economies of scale in management - which normally takes away a large slice of gross yields.

 Institutions are planning a new class of investment involving CUPs - city urban professionals - aged 25-35 and renting  purpose-built, city-centre flats. 'All the demographics show that this is where growth will take place in cities like Manchester, Leeds and Edinburgh, as well as London,' says Hill.

 Fund managers  are taking a long view and wrap capital appreciation in with rents. 'It is ironic that no-one mentions private landlords selling because prices are so strong,' says Jopling. 'This is part of the investment equation. Funds were never interested in an income-based model.'

 This is an argument well-rehearsed by Kerry Kearton-Gee of London & Henley, which spent 60m pounds this summer buying the Cavendish Geared BES schemes and buildings in Marble Arch and Holborn. 'You can't look at rents alone as a justification for residential investment,' he says. 'You must include capital.'

  The next six months could see the pendulum swing to professional landlords as private investors disillusioned by falling yields and rising voids take advantage of booming prices to sell out. This is more likely  to go to  owner-occupiers rather than fund managers, however. 'They are looking for a new asset class: purpose-built blocks created purely for renting,' says Jopling.