Rental returns attract M&G, but others missing out

Investors standing on the side and looking at residential rental property will find “their concerns are well-founded, but they are also often overdone”. That’s the view of Alex Greaves, a fund manager at M&G Real Estate, who is keen to spread the word about the sector, which he is currently investing in.

M&G is acquiring build to rent housing across the UK, and in an opinion piece published recently by Property Week, Greaves says many institutional investors are missing out, prejudiced by outdated thinking. They “fret about residential’s higher operating and management costs, as well as the shorter leases,” he says.

But ignoring the private rented sector means missing out on a positive story. Recent figures from the Investment Property Databank show residential rental property returned a total 14.7% return in 2013, with a six year performance of 10.7% beating such alternative investments as commercial property and government bonds.

Greaves notes the following positives:
the average renter stays in their home for three years
the private rented sector has doubled in a decade, to 4 million households
operating costs in the PRS have fallen by 20% in the past three years
voids, reletting and repairs are easier if you own the whole block.

And there are considerable economies of scale that kick in, such as hiring a direct maintenance team, buying fittings and hardware in bulk, and customising the design to suit renters. Energy efficiency measures start to pay back for both landlord and resident, and M&G has already seen the benefit of such measures across its retail investments; experience it is keen to migrate to the residential sector.

You can also then add in items that make your offering considerably more attractive to tenants, such as communal facilities, cycle storage, help with moving in and so on. Greaves reckons these start to work, once you have at least £1.75m of rental income a year.

The consequences of these actions can then lead to a virtuous circle. Rather than moaning about costs or slow attention to problems, residents are happy – they stay longer (reducing voids) and recommend the landlord to their friends and colleagues. Word of mouth recommendation is a valuable asset, and in short supply currently in the private rented market.


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