I nearly fell off the cross-trainer. I know it will shock some readers to hear that, at this relatively mature stage in life, I have taken to going to the gym in the mornings. But it may also surprise you that the other thing I have taken to is residential investment, and not in an insignificant way: 1,700 units in the UK so far.
For the past three years, since I got the call from Sir Bob Kerslake asking why those of us involved in the commercial investment sector wouldn’t invest in residential property, I became aware of the compelling fact that residential investment is the holy grail of investment, out-performing all other asset classes but with lower volatility. The institutions had not entered the sector in any meaningful way, owning about 1% in the UK compared with 37% in Netherlands.
In theory, I could find many perceived barriers to entry, but nothing insurmountable. There was a need for efficient management, particularly to protect the reputation of an institution’s brand. But how difficult could that be?
When I joined RBS two years ago, the team had been acquiring completed and part-completed new housing units and, in the absence of purchasers, letting them. I realised this could, one day, be a foundation for a private rented sector (PRS) fund and we recruited two fund managers with more than 50 years’ residential investment experience between them. We then embarked on the interesting journey of building a PRS platform.
So, back to the cross-trainer. While on it, I was watching the news. Suddenly, a report came on about the possible introduction of rent regulation and longer security of tenure for residential tenants. It gave me such a shock that I had a major wobble. For anyone who did not practise before 1988, this may seem a novelty.
But I would remind older readers of the joys of rent tribunals and landlords’ scams for avoiding regulation (one I knew delivered a small box of cornflakes daily to claim it was a serviced apartment). The quality of the stock was poor, as there was little incentive to improve it. Capital values fell as a result of poor liquidity generated by an inability to get vacant possession, so the institutions left the sector.
It was interesting that the proposal emerged just as the institutions are re-entering the market. I am sure those proposing this are aware of the excellent work being done to stimulate the sector by the Department for Communities and Local Government, particularly by Andrew Stanford, head of the Private Rented Sector Taskforce. On closer examination of the proposal, it is not as dramatic as a return to the heavily regulated sector, but it could be seen as an unhelpful signal.
As a fifth of people will be in private rented accommodation by 2018, residential is vulnerable to politicians looking for greater regulation of the market. Those of us with PRS stock know that tenant retention is key, as reletting fees and even a couple of weeks’ vacancy will hit returns. We also sacrifice some rental growth to ensure that we retain high-quality tenants who look after the property, but I would argue that this is no different from our commercial investment portfolio.
Some would argue that my recent experience of PRS has been charmed. The stock in the RBS portfolio is predominantly new-builds (compared with 41% having been built before 1919 in the sector as a whole). We have recruited an excellent team, which has appointed some great property managers. As far as worries about reputational damage go, I worry daily. I am part of a team at RBS that is trying to rebuild trust in a brand, and I know how damaging it would be to be a poor landlord.
So it was particularly heart-warming to be a finalist in Property Week’s RESI Awards as Residential Landlord of the Year earlier this month.
The past two years of working with a great residential investment team at RBS has convinced me that when the institutions eventually commit the predicted £7bn to the sector, they will wonder why they didn’t do it earlier — it really is very good for you, just like going to the gym.
Helen Gordon is global head of real estate asset management at the Royal Bank of Scotland