One of the biggest trends among institutional investors in recent years has been their increasing appetite for “real assets,” meaning investments such as offices, shops, warehouses and distribution centres, as well as infrastructure (roads, hospitals, schools, airports, power grids, and so on) and to a much lesser extent residential property.
The explanation is simple. The income institutions can earn from traditional investments such as corporate and government bonds has dwindled almost to nothing, and most bonds are now so expensive that there is little prospect of prices going up much. Investments such as commercial property and infrastructure, on the other hand, have relatively strong yields that can be sustained (thanks to rent increases, for example) and they retain some scope for capital gains, making them more appetising than another helping of over-priced bonds.
If this is all starting to sound a bit like the buy-to-let market, that is not a coincidence. The “real assets” that institutional investors and their highly paid consultants like to talk about, and the terraced houses and two-bed flats that private investors have been snapping up, have much in common. The biggest difference I can see is that the government appears keen to persuade institutions to pour more money in infrastructure, and equally keen to dissuade private individuals from investing in buy-to-let property. First the Treasury cut the amount of mortgage interest buy-to-let owners can write off against rental profits, then it slapped an extra 3 per cent stamp duty on purchases. Finally, in November the mortgage affordability test for buy-to-let investors with four or more properties was toughened up.
You can of course argue that the UK’s politicised housing market already has too many small, private landlords, many of whom are under-investing in their properties and therefore degrading the quality of the housing stock over time. That may be partly true. But I don’t think it’s fair to assume that what institutions are doing is OK, but what individuals are doing is greedy and detrimental to the public good. They are pursuing very similar goals for near-identical reasons—neither can see a better way to meet a long-term need for income and capital preservation, and neither is therefore morally superior to the other.
To me this is all a question of means, not ends. If the government wants to change the nature of the private rental market and encourage institutions to become landlords instead of individuals, it needs to create the incentives to make that happen. So far, it has erected further barriers to greater individual ownership of rental property. But that is not going to snuff out people’s desire to invest in it; it’ll just make it more expensive. What is required is an alternative way for individuals to invest in rental property, via funds that offer both a decent yield and a share in any capital gains.
Targeted incentives to invest through this route, alongside with the barriers to direct buy-to-let investment that have already gone up, might turn private rental accommodation into a primarily institutional market and raise the quality of the stock, without penalising and excluding the private direct investor.
