The ‘herd mentality’ is a recognised phenomenon among institutional investors, and is typified by Alex Greaves’ article ‘Investors should partner housebuilders for PRS profit’.
He asserts that it is difficult to access the private rented sector (PRS) by investing in standing stock. There are around 1,000,000 transactions of standing stock a year. While most of these properties may not meet institutional investors’ requirements, many will. Constructing portfolios of standing stock is not easy - but it is easier, quicker and less risky than developing new property.
As pretty much every institutional investor is looking to do exactly what Greaves proposes in terms of ‘partnerships with housebuilders’ they are all competing for the same type of newly developed stock. It would therefore be surprising if the institutional investor gets the best of a deal with a housebuilder, who will have the option of doing a deal with several competing investors or selling the properties to owner-occupiers.
One of the main attractions of residential property besides the consistency and quality of income is the uncorrelated returns. However, institutional investors are less likely to benefit from this phenomenon by building purpose-built rental property that can only be sold to other institutional investors on yield-based valuations rather than owner-occupiers or buy-to-let investors, who comprise 90% of the residential market.
There is a shortage of quality rental property and build-to-rent does have a role to play. However, to disregard good quality standing stock is to not only ignore a huge opportunity - it is also likely to lead to lower long-term returns for institutional investors.
Graham Gould, chairman, Invesres