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Institutional investors could solve supply problem

Sam Cordon

June 20, 2013

Research from Savills estimated that over £200bn of new investment is required over the next five years to fulfil demand for rented accommodation alone.

Christopher Down, chief executive of Hearthstone Investments, said: “The real volume of new investment will come from institutional investors some of whom from overseas are already circling UK residential as a maturing asset class ripe for investment.

“Government attention on this side of the financing equation needs to focus on the areas that matter to investors, such as market data, planning timescales and use categories, legislative stability and long-term commitment.”

The lack of supply of housing, which has created pockets of house price inflation, is undermining what Hearthstone considers “an otherwise stable” asset class.

Down said that the government is right to introduce initiatives that encourage the formation of investment funds such as the Property Authorised Investment Fund tax structure and the changes to Stamp Duty Land Tax in 2011 which reduced the cost of establishing large scale buy-to-let or build-to-let portfolios.

But he highlighted there was still an emphasis on owner occupation in government policy which does not match the likely source of new investment into the sector.

Down said this was because house builders are generally not going to be motivated to over-supply and will tend to optimise margins on their land bank rather than to try and fully meet all available demand.

It has been widely reported that the UK needs approximately 200,000 homes per year to be built whereas in recent years the building sector has delivered around 100,000.

He said: “This is a fundamental demand and supply driver which must be corrected if UK housing is to be accepted as an asset class based on its income and inflation proofing characteristics – rather than a speculative house price index growth story. That acceptance is, in turn, vital for stimulating continued investment in the sector by large-scale institutional investors.”

Hearthstone said first-time buyer sales, encouraged by the FirstBuy initiative, were unlikely to have a meaningful effect on UK house building.

Downs added: “If the scheme were fully utilised and delivered £3.5bn of new equity loans representing £17.5bn of overall new house purchases it would still only represent 74,000 new homes over the scheme’s lifetime – compared with an annual requirement of 240,000 homes. For the last three years not even half this number has been built.”

He would prefer to see a more joined up approach to the government’s policy.

He said: “If both first-time buyer stimulus and action within the institutional investment space are taken then we may actually see overall construction begin to meet effective demand. Something which will stabilise house price growth to the long-term fundamentals and address the scaremongering over market bubbles which restrict new investment, creating the vicious cycle.”


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