Experts seek more funding for rent sector

Professor Whitehead: rate of return on investment inadequate. Picture: Contributed

Trade body Homes For Scotland (HFS) is leading research to devise ways to attract institutional investment that would encourage more building.

It has appointed Professor Christine Whitehead and Kathleen Scanlon of the Cambridge Centre for Housing and Planning Research (CCHPR) and the London School of Economics to address the reasons why pension funds don’t invest in building homes for rent in the UK. The Scottish Government-funded research will be presented to stakeholders including investors in October.

The academics believe the issues keeping investment out of new-build houses are due to the wrong culture and a lack of scale.

Whitehead said: “At the moment the private rented sector doesn’t get investment. Currently houses available in that sector come from existing housing stock. That is depressing new build.”

The professor of housing economics believes that investors are now looking for different types of long-term investments as traditional assets such as gilts and equities fail to produce adequate returns.

“There’s shed loads of money waiting to come into the residential market. We hear that all the time,” she said. “There is evidence investors are more interested than they were. There have been a few deals but the numbers are not large. Most studies done by Savills and others show that the long-run rate of return on rent alone is not adequate to get significant new build. You are bound to ask whether you can find a way of making it more attractive. Obviously the government wants more houses, developers want more development and financiers want more opportunities.”

She added: “Probably the biggest issue for Scotland is trying to generate adequate scale. But we aren’t for a moment trying to pretend we know the answers yet.”

There have been some successful projects aimed at developing flats for rent in the UK, backed mainly by local pension funds in London and Manchester. And while such investment is still rare across Europe, it is more common in North America.

Scanlon, a research fellow, said: “There is an element of experience. This is something that American and Canadian investors are more comfortable with and familiar with. It is much less so here.

“Obviously there are hard numbers we have to go through, but it might be something that takes a cultural change as investors get used to this idea and get familiar with these mechanisms. There are perceptions of risk that don’t reflect reality.”

Philip Hogg, the chief executive of HFS said: “We have an industry that has all the skills in building, design and construction. We have professional property managers in the form of registered social landlords and supposedly have all this cash looking to find a place to invest. What we are doing is trying to bring all those interests together and tease out what needs to change. Because clearly something needs to change or else it wouldn’t need intervention.”

The Scottish Government has funded the £70,000 report. In May it said that 465,000 new homes are needed by 2035 to cope with expected housing demand.