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Private-rented sector faces obstacles to growth

James Kenny 25/05/2011 12:00

Day-to-day management issues and finding the right stock remain the key issues delaying the development of an institutionally backed private-rented sector, according to a panel of experts.

Speaking at a panel discussion on residential institutional investment, a number of players maintained that, while there is an attractive case for such an asset class, there are still boundaries keeping the sector at bay.

Dana Hamilton (pictured), managing director of residential specialist Archstone BV, said working in the sector was an operations- and people-intensive business - aspects that could deter some institutions.

Hamilton, said: "The residential sector is an operating business. You need critical mass and the right resources to make institutions want to invest. The opportunity is right in the UK, but they must have the right format in place."

This view was backed up by Stephen Yorke, fund manager of D&G Asset Management's Prime London Capital Fund, who said: "The residential market, especially the maintenance high quality stock, is a very labour intensive business. You constantly need to improve and look to add value. Perhaps this is why institutions are backing off?"

The real estate arm of Aviva Investors has been working on a £1bn fund for more than a year, and is said to be on the verge of launching it, particularly following changes to Stamp Duty in the Budget. Chris Lacey, executive director and head of mixed-use funding for CB Richard Ellis, is working closely with Aviva on the product, and while he maintained the institution is "very close" to launch, there are still boundaries for others in the sector.

"There are 60 to 70 funds out there, and they all want a piece of residential action. This can cause problems when everyone is trying to source good quality residential stock. You also have to decide geographically where you're going to target, and who are you going to align with, for the day-to-day management of the properties."

Dr Ian Cullen, founder and managing director of IPD, also claimed that institutions were starting to notice the case for residential property. The IPD, which has been producing its residential property index for 10 years, and has found the asset class produced an annualised total return of 10.1%. This compares with 6.7% pa for commercial property.

Dr Cullen said: "We have had a number of different houses come to us and request data, and which have showed interest in setting up their own funds. However, most of these have been niche houses. Aviva is the model that is most successful and close to launch. All the other houses are far behind it."