European asset owners should look to the UK residential property market for the next big opportunity in real assets, according to property managers.
A large demand-supply imbalance in the country’s rental market coupled with a recovering economy presents an attractive backdrop, the managers claimed, despite growing demand for physical assets and the strong long-term past performance of the UK market.
“The current opportunity lies in developing intelligently designed rental accommodation, which will be professionally managed and seeks to meet the needs of this growing population who need to rent,” Invesco said in a white paper.
Less than 5% of the UK’s private rented sector is owned by institutional investors, according to Invesco’s research, while the more mature US equivalent market is much more accepted as a viable asset class by pension funds.
Between 1982 and 2014 both markets grew exponentially but the US has remained significantly larger than the UK for most of that period, data showed.
“The US index has remained at or around 10 times larger than the UK index over this timeframe,” Invesco reported. “Given that the US population is circa five times that of the UK, the UK index is significantly underrepresented. This suggests there is an opportunity for institutions to increase their exposure to the UK residential sector.”
Successive UK governments have been criticized for a lack of investment in housing, which Invesco’s research claimed would lead to a deficit of more than one million homes by 2020 if not addressed. The current government has promised to build 400,000 “affordable” homes by 2021.
In addition, rival property manager M&G Real Estate claimed in a recent outlook paper that the UK government was “trying to actively encourage” institutional investment in the residential market by excluding large-scale buyers from tax increases.
“This can only be beneficial for institutional residential investment prospects in the medium to long term,” M&G’s researchers wrote.
Related: European Pensions Refocus on Property & Are You Paying Too Much for Your Property Exposure?