Investors seek profits on the exceptional housing demand. Fortunately, public and private programmes synergistically encourage home building.
“Everyone needs a home over their head at the end of the day.”
This is what a UK residential property fund manager said in January 2015 to Professional Pensions, a website dedicated to institutional investors who are tasked with achieving the highest returns for their clients.
The fund manager (from M&G UK Residential Property funds) described being involved in the property market with built-to-let properties as well as participating as an investor in the development of new-build homes. The 25-34 age group is a focus of this funder, which means they target properties that are near public transport.
That particular age cohort is indeed important, not because of where they stand in wages but more because they represent pent-up demand. With tight lending in the UK – particularly after the 2008 financial crisis – homebuilders were reluctant to construct new homes at the entry level for first time buyers. In the past decade, this has slowed housing formation altogether or put people into the rental class who would likely be owners under other circumstances (working people who rent now comprise about 19 per cent of the market, up from 11 per cent a decade ago).
Homebuilders and developers are fully aware of this demand, but were waiting on the sidelines because of the difficult financing matter. Today, there are several factors addressing this blockage to building – which have spawned creativity in the private sector as well as from the government:
Help to Buy programme – First time buyers and home movers are provided equity loans on properties with purchase prices up to £600,000. Buyers need to contribute at least 5 per cent of the property price for a deposit while the Government provides a loan up to 20 per cent of the price. The buyer then needs to qualify for a 75 per cent mortgage loan. No loan fees are charged for the 20 per cent Government loan for the first five years of home ownership.
Starter Homes programme – Available at a 20 per cent discount to under-40 buyers, this housing bill is targeted at increasing the UK housing stock by 200,000 residences. All homes will be built on brownfield (previous use) land. It is favourable to self-builders and smaller home construction companies with reduced bureaucracy and a streamlined neighbourhood planning process.
Property fund management of strategic land – From an investor’s perspective, this is a way to help increase the country’s housing stock while achieving asset growth. their skills are in designing homes, building and then selling them. With increasing frequency, they are able to buy lots on streets that have utilities installed and planning approvals already cleared, thanks to the work of developer-investors. The investors, typically working in joint venture partnerships, identify where homes are needed most and find land that can increase in value if allowed a use designation change by the local council. Once that is accomplished, they sell lots to builders.
Crowdfunding – Start-up investment companies are launching a global stock exchange for residential properties in the UK and possibly abroad. Launched in early 2015, Property Partner has properties in London and the South East where more than 1,000 investors have invested as little as £50 on up to £50,000 in homes, hoping to receive rental income and possibly capital growth. The shares are highly liquid and can be traded via a one-off transaction fee of 2 per cent. An additional 12.5 per cent fee is charged for advertising, letting and managing the property.
It took an improving economy to convince investors that the homebuyers and home renters were ready to jump out of their parents’ flats and into their own homes. Government programmes have had a measurable impact, but entrepreneurial thinking on the part of strategic land partnerships and others has made the private sector a good partner. With a shortage of one million homes, it will take a decade or longer to bring supply up to demand.
Investors should always be versed in the risks of their positions. Consulting with an independent financial advisor can help identify tolerable risk, particularly in relation to other wealth development goals.