UK institutional investors are significantly underinvested in the private rented sector (PRS), the fastest growing tenure and highest performing real estate asset class in the UK, says Invesco Real Estate's white paper. 

With under 5% of the PRS owned by institutional investors and a growing residential supply and demand imbalance, investors could be missing out on the potentially attractive return profile of this strategic market sector, which has also been less volatile than other more 'traditional' real estate such as offices and retail, says the firm. 

Against this background, there has been increased institutional transactions in the UK by cross-border investors. For the twelve months to the end 2014 total residential transactions, as recorded by Real Capital Analytics, amounted to circa £2.5bn, with over 60% of these being made by non-UK investors, a 10% increase on the 50% as recorded in 2013.

“With the increasing under-supply of housing in the UK and population growth being one of the highest in the EU, we believe this demand and supply imbalance will continue to put pressure on house price affordability and mean that PRS will continue to grow as a tenure. This means that there is the potential to create investment opportunities for institutional investors into the UK PRS. All regions in the UK have established PRS markets, but London and the South East are the locations with the largest PRS markets and greatest supply/demand imbalance.

“However, it’s important that investors pay close attention to how deals in the UK PRS sector are being sourced. Finding alternative deal sources such as working with developers/contractors rather than housebuilders, gives IRE access to off-market products, which we believe is an important differentiator in the PRS sector.”

The paper also compares the UK PRS with the multi-family rental market in the US by comparing the UK IPD Residential Index and the US NCREIF Index which measure the market value of institutionally owned residential investments. 

In 1982 the UK Index amounted to £15.6m and the US Index was £88.4m. The UK market had grown to £5.9bn in 2013, whilst the US market had increased to £54.9bn. Given that the US population is circa five times that of the UK and the US Index is 10 times larger than the UK, the UK residential is significantly underinvested in terms of institutional money. 

This is in contrast to the historic performance of the UK Index which outperformed the US in 22 of the 32 years averaging total returns of 13.7% per annum versus 9.7% per annum for the US.