Can institutional investors ease the pressure for the PRS?

High-quality private rented housing in well-built areas could be a solution to the housing crisis issue in the UK. Supply for well-made rented homes is not meeting renter demands. Can investor backing bring this solution to life? Cedric Bucher from Hearthstone Investment reflects.

Cedric Bucher, Hearthstone Investment CEO | BTR News
Cedric Bucher, Hearthstone Investment CEO.

As the UK housing crisis is in dire straits and more and more people struggle to get onto the property ladder, the demand for high-quality private rented housing increases. However, much of the market is not meeting renters’ needs. Further investment in the market could ease this pressure for the private rented sector. Hearthstone Investment’s CEO Cedric Bucher discusses this issue.

By Cedric Bucher, CEO, Hearthstone Investment

The UK housing crises is often high in the news agenda and a significant shortage of stock means demand for homes continues to far outstrip supply. In fact, according to Centre for Cities, Britain today has a backlog of 4.3 million homes that are missing from the national housing market.

Exacerbating the problem is that much of the private rented housing currently available is not fit for purpose. As the Government’s ‘A Fairer Private Rented Sector’ white paper from June 2022 acknowledges: “The reality is that far too many renters are living in damp, dangerous, cold homes, powerless to put things right, and with the threat of sudden eviction hanging over them.”

Surely the golden ticket is to increase the volume and ensure housing stock is of high quality, well-managed and built in areas where it’s needed the most?

So how can we turn this wish-list into a reality?

A powerful solution

Institutional investors, including public and private pension funds, insurance companies and savings institutions have the potential to make this change.

By investing in residential housing for the private rental sector, institutional capital has the power to provide a boost to the UK’s private housing stock, both in terms of the numbers being built and by providing reassurance to tenants that they will enjoy a high-quality, energy efficient home that’s owned and managed by a bone-fide landlord.

There is a precedent. McKinsey’s 2021 report on the industry found an average of 16% of a typical institutional fund will be devoted to real estate investment. Even if a small proportion of this is diverted to the private rented sector, we will see a significant sea-change.

Benefits to society

The impact of institutional investment in this sector goes above and beyond the ability to deliver good homes in volume.

Despite the pro-ownership rhetoric, we hear time and again from Government that not everyone wants, or is able, to buy their own home. According to the English Housing Survey 2021/2022, the share of households that were occupied by private renters hit 19% – a significant proportion. By providing good quality homes in attractive locations, which are affordable to families with average incomes (think young professionals and key workers, for example), some of the pressure on the current housing situation will be alleviated.

It isn’t an overnight fix, and it will, of course, take time. But by investing in the private rented sector, institutional funds, typically seeking long term investments with stable returns, can commit for the long haul, providing well-maintained homes for average earners.

For investors who want to see the fruits of their investment within their own area, a regional focus can also be achieved through an element of local bias possibly within a broader investment portfolio. This would deliver homes within a specific geographical area while creating employment locally in the process.

When it comes to quality, institutional investors have an inherent commercial incentive to maintain properties well and carefully select their residents and look after them. Good quality housing equals happy, committed residents, which in turn equals resilient returns.

Against a backdrop of a largely unregulated private rental market, it feels like a win-win situation.

A sustainable solution

Institutional capital can play its part in the drive for more sustainable housing in a way that private landlords simply can’t. By working to specific, high-level criteria around factors such as energy efficiency, provision of electric car charging points, access to community amenities or green spaces, for example, investment is made in property which will meet the ESG requirements of the investor while simultaneously delivering quality, sustainable housing for tenants. Not to mention the associated cost savings which come from living in well insulated, energy efficient homes.

An opportunity to diversify

The private rented sector can act as the ultimate diversifier in a mixed asset portfolio, and, in the longer term, it offers institutions steady, long-term, resilient income as demand for quality rental housing for people on average salaries will continue to outstrip supply.

Institutional funds have a significant role to play in building a positive future for the UK’s private rental housing sector, backing a greater volume of high-quality, sustainable homes.