Smaller institutional investors are being locked out of investing in the UK residential market, a new report has found.

UK residential is an attractive asset class for investors such as small pension funds, but there need to be more routes to market.

Smaller investors default route to market is still investing directly via buy-to-let but this is a high-risk strategy, according to the study by report by Seven Dials Financial.

It says the UK’s residential market is missing out on billions of pounds of potential investment from smaller institutional investors because of a lack of suitable investable vehicles,.

The research, conducted by Cambridge Research and Investment Consultants (CamRIC), examined the UK residential market to determine the choice of investment vehicles available to the smaller investor investing under £2m.

Barriers to small investors

The headline finding of the report is that residential remains almost as impenetrable to the small or private investor as it was a decade ago.

Despite the view that UK residential is maturing as a real estate sector, rapidly becoming a standard part of an institutional property portfolio, for the smaller institutional investor, the conventional way to allocate funds into UK housing is through a buy-to-let house or flat.

Given the uncertain economic conditions created by Covid-19, many institutional investors both large and small will be looking to allocate their assets towards safe havens, of which UK residential is one.

Residential property has performed well with strong house price growth in real terms, estimated at 2.6% between 1975 and 2019, while residential rents have inflation-matching characteristics – residential rents have grown by 3.9% p.a. compared with CPI growth of 2.6% in the period 1988-2019, the report finds.

Encouraging more institutional investors will be vital for the growth of the Private Rented Sector (PRS) of UK residential.”

Additionally, encouraging more institutional investors will be vital for the growth of the Private Rented Sector (PRS) of UK residential, particularly given that stamp duty tax changes are making it less feasible for the individual buy-to-let investor.

Currently, institutions only account for £35bn of the more than £1 trillion PRS market, according to the 2019 Investment Property Forum (IPF) report, the Size and Structure of the UK Property Market.

Residential REITs

Mickola Wilson, director at Seven Dials Financial says: “Much has been made of growing institutional investment into UK residential, but by effectively barring the smaller investor from being able to allocate their funds efficiently, the asset class risks losing out on significant amounts of capital that will be seeking a safe haven against the backdrop of the economic crisis caused by the pandemic.

“Our findings show that aside from investing directly into buy-to-let, REITs remain the best bet, though the limited number of UK residential focussed REITs and the fact that these vehicles are vulnerable to stock market fluctuations means that for many smaller investors these may not prove suitable vehicles.”

She said there was a number of new investment vehicles in the pipeline that may allow a greater amount of smaller institutional investors to enter the market.

“There should now be concerted efforts to open this asset class up to a wider array of institutional investors, especially as today’s market conditions mean many managers will be looking to allocate their funds into safe havens,” she added.