Residential property has the potential to be the perfect asset class for pension funds and life companies seeking an income stream closely linked to wage inflation. The UK government needs to stimulate house building to meet anticipated demand. It is time for some joined-up thinking to realise the potential and implementing this 10-point plan would help the process along
Put residential into the property benchmark. Investment managers are judged on their performance against an index. If that does not have a residential element, there is a risk to the manager in allocating money to the sector.
Ensure political consensus on policy issues. Consensus on a market-driven approach to the residential sector is essential, because investors would be wary of the impact of big policy swings. When there was a threat of regulated rents and security of tenure being reintroduced, investor appetite for residential property was low.
Remove stamp duty on large investors. Imposing stamp duty on investment transactions in real estate at a higher rate than on transfers for other asset classes does not aid competition or efficiency. Residential stamp duty penalises large investors over buy-to-let investors. The large investor suffers stamp duty on the aggregate value of the transaction, rather than the charge related to the housing unit value. This means a 4% hit on every transaction, compared with the unit-by-unit buyer, who is exempt or incurs a lower rate.
Reduce VAT drag on performance. The residential investor is at a comparative disadvantage to the commercial one because VAT is not passed through to tenants on rent. As a consequence, VAT on fees and refurbishment costs is a drag on returns. The government should reduce this.
Decouple investment values from a percentage of vacant possession value. It is hard for commercial investors to understand why the principal valuation metric for residential investment in the private rented sector is the value of the property without a tenant. Investors are motivated by purchasing blocks at a discount to vacant possession, to liquidate assets on expiry of tenancies. An approach driven by valuing the income stream is desirable because:
It creates an incentive for managers to look after tenants and provides a more stable stock of rented inventory
It is likely to generate more purpose-built rented property
Emphasising the income stream plays to the advantage residential property has for pension funds. Rental streams should be closely correlated with wage inflation.
Invest in a residential investment index. A quarterly index is essential for creating benchmarks for residential investment managers to be judged against. It should comprise data collected on real investments and not the composite of house price movements and rent.
Ensure suitable investment vehicles are available. Investors are concerned with the practicalities of assembling portfolios of relatively low-value properties. They dislike the management requirements of rented housing and the reputational risk of being seen to evict tenants in default.
A real estate investment trust structure could be attractive. However, it needs to be looked at with other elements of the 10-point plan. Seeding relief should be available to managers assembling portfolios. Double stamp duty would kill any new funds.
