The wear and tear caused by tenants and a lack of regulation in the rental market combined with resulting low yield levels means that the Government’s push to increase rental investment will not create the anticipated uplift in stock.
In March’s Budget, the Government introduced several measures including lifting individual stamp duty being charged on bulk property purchase and loosening planning laws to encourage private investment in residential accommodation. But this is not enough according to investment experts at Mill Group.
David Toplas, CEO of Mill Group, said:
“The most significant obstacle preventing more meaningful investment by UK institutions into residential property over the past decade has been a perception of intensive asset management and low income yields.
“Quite simply, a tenant does not have enough financial or emotional investment in the property to maintain it to a reasonable standard and this ultimately costs landlords so much money that the investment potential is undermined.”
Mill Group believes that a co-investment model, which encourages joint-investment from an owner-occupier and an investment fund, would create the right environment for an uplift in property purchase and ensure that property standards are maintained.
In turn, this would remove the strain on the private rental sector where there is simply not enough stock to meet demand, particularly around family homes.
“Under co-investment, a resident owner-occupier and an investment fund jointly own a dwelling. The share of the property initially owned by the investor can vary from 85% - 95%, depending on mutual agreement,” explained David Toplas.
“Home buyers will be asked to purchase a minimum of five per cent of the property – a deposit amount that is not currently accepted by most mortgage providers as a deposit, and so begin their purchase of a property without a mortgage lender.”
Unlike residential let with its high dependency on planning laws and development costs, co-investment in residential owner occupation avoids these delays and costs, being able to choose properties that are currently built – be they new build or old.
The average rental deposit required for a house within prime central London is around £5,000 for the first quarter of 2011, based on a six week deposit. This is a 17% increase from the final quarter of 2010.
The money which constitutes a rental deposit could be invested more wisely through co-investment.
That consumer would only need to add another £5,000 to become a co-owner of a £200,000 property with full rights of occupancy and the potential to benefit from house price inflation. There would be no stamp duty to pay as this is paid by the Fund.
The effect is to allow investors to refocus on management efficiency and revalue residential as a high yielding asset class.
And, also facilitate the purchase of homes for those consumers who are unable to afford the large deposits required by banks and avoid seeing their funds tied up in the large deposits that rental landlords now demand with little or no return.
In January, Mill Group launched a £100 million property investment fund that will offer investors the opportunity to invest in residential owner-occupied property by providing new source of liquidity for first-time buyers and removing their need for a mortgage.
Mill Group believes that London will continue to offer a strong opportunity for property investment, given the higher value business activity in the capital and the importance of the financial services sector.
