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UK’s multifamily sector moves up a gear

Investors in the UK’s multifamily sector are scaling up and expanding, boosting overall investment volumes.

October 16, 2019

Last year saw more than €6.7 billion (£6.1 billion) of assets change hands with London the fourth most popular market in Europe for multifamily investment, according to JLL.

Single asset deals and joint ventures with local developers have typically been the most common route into the sector. But institutional investors are now looking for scale as they struggle to deploy record volumes of unspent capital raised for real estate investment.

With a shortage of institutionally acceptable real estate stock in the market at this late-stage in the cycle, core investors are having to move up the risk curve in an effort to meet return targets, says Simon Scott, lead director, Living Capital Markets, JLL.

“Buying into UK platforms is becoming a more frequent tactic among investors - particularly until more portfolio pipelines are built out and begin to perform.”

The property arm of Canadian pension fund, Ontario Municipal Employees Retirement System, took a £600 million stake in build-to-rent specialist Get Living.

The more purpose-built, institutionally-owned rental assets emerge, the more likely investors are to consider platform opportunities, Scott adds.

Still, sourcing deals remains challenging at this stage in the cycle, with record levels of dry powder sitting in funds. At the mid-year mark, firms had US$331 billion of unspent capital.

As a result, investors are looking beyond London at markets across the country. Portfolio deals with more than one location reached a record €1.6 billion (£1.45 billion) in 2018, up from just €60 million (£54.5 million) in the previous year.

The development pipeline in the UK regions is now at a similar level to that of London, says Philip Wedge-Bernal, from JLL’s Living research team. “That’s a sign that confidence in UK multifamily has grown and is no longer exclusive to the capital.”

While London alone attracted €2billion (£1.8 billion) of investment in 2018, Manchester saw €715 million (£615 million), while Leeds and Birmingham attracted €400 million (£363.6 million) and €330 million (£300 million) respectively.

“Large regional UK cities from Edinburgh to Birmingham and Manchester have grown in popularity,” Wedge-Bernal says. “Investors are now looking a bit further, realizing the micro-location within a city is as – if not more – important in the investment decision than the city itself.”

Domestic capital takes the lead

Investment by domestic investors in UK multifamily assets tripled to €4.57 billion in 2018, with Grainger, Legal & General, M&G Real Estate and Aberdeen Standard the most active players.

“The UK multifamily market has previously been dominated by large, international funds,” says Scott. “But as the sector grows, we’re now seeing domestic institutions lead the wave of activity within the sector.”

While domestic investment is up, international capital has not held back either. North American capital accounted for nearly 90 percent of all foreign multifamily activity in the UK in 2018, while Japan’s biggest housebuilder, Sekisui House this year invested in a UK modular homebuilding venture, alongside Homes England.

“Many institutional investors are recognizing the correlation between their need to match liabilities and the multifamily sector’s strong performance and defensive characteristics,” Scott says.

Political uncertainty in the form of Brexit may give investors cause to pause, but the long-term reliability of multifamily assets means investors can “look beyond” the current uncertainty, says Scott.

“That’s partly because many investors are institutional and by nature long-term,” he says. “But it’s equally a sign of confidence in the potential of UK multifamily to stand and deliver.”

 

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