Half a century ago, City institutions owned swathes of homes catering to the country's large private rented sector. But rent controls introduced in the 1960s became a regulatory nightmare, and it also became easier for private individuals to buy their own home. The City gradually sold out, and now housing accounts for less than 1 per cent of total real-estate investments in UK institutional portfolios, estimates the benchmark provider IPD - compared to nearly half for Switzerland and Holland.
City investors are now wondering if they missed a trick. After a decade of volatile performance from equities, they desperately need 'alternative' assets to match their liabilities. Property is one answer - but the commercial sector has proved very cyclical, with a 45 per cent decline during the 2007-09 after a long boom. Housing had a comparable boom, but has proved much more resilient since, with a peak-to-trough fall of just 20 per cent.
Moreover, rents are now growing strongly, underpinned by Britain's perennial housing shortage and a free-market tenancy system (Margaret Thatcher abolished rent controls in 1989). Even the long trend towards home ownership seems to have reversed. The proportion of households in the private rented sector hit a trough of about 10 per cent in 2000 and has since risen back to 16.5 per cent - higher than in 1981 - mirrored by declines both in social renting and, since the credit crunch, in owner-occupation.
The current government is also keen to encourage City investment in housing. It reduced stamp duty for bulk purchases of flats in the 2011 Budget, and in December introduced changes to the real-estate investment trust wrapper to accommodate housing. Further reforms should follow – the Communities and Local Government ministry has launched a review into "barriers to institutional investment in private-rented homes" under business grandee Sir Adrian Montague, who is due to report in June.
What does all this mean for private landlords? Some may see the interest of bigwigs in Westminster and the City as a welcome seal of approval for the buy-to-let sector, with its oft-scorned social role. But more sinister interpretations are also possible. "Any new entrants to the sector are a potential threat," points out David Lawrenson, a landlord-cum-consultant to the private rented sector.
My hunch is that landlords don't need to worry. It is far from clear institutions will be able to invest in housing, whatever inducements the government provides. And even if they do, it would hardly be on a scale to rival the existing private-rented sector, which can barely keep up with demand. A parallel case is student housing: increased institutional involvement in recent years (notably Unite Group) has hardly choked off rents for more traditional student digs. City investment could even bring benefit, by improving the appearance of run-down areas and making renting more socially acceptable.
But let's not get carried away - so far no mainstream money-manager has managed to set up a residential fund, despite various attempts. The only examples of City investment in housing are in the more flexible listed sector, with strategies that are hard to replicate. Grainger, the only pure residential play on the London Stock Exchange, mainly owns properties that are still subject to old pre-1989 tenancy laws - a dwindling sector. Real-estate investment trust London & Stamford has bought a number of big housing developments in inner London, which it plans to turn into a residential Reit. But its approach has been essentially opportunistic, buying property on the cheap where it saw a developer in distress.
The experience of Terrace Hill, the Aim-listed developer, is revealing. The company used to own a 49 per cent stake in a £185m residential fund, out of which it hoped to seed a bigger fund for institutional investors with Aegon Asset Management. But eventually the project fell through because "there wasn’t sufficient interest," says chief executive Philip Leech.
Yolanda Barnes at Savills says residential investments are "being very seriously considered" by institutions, but plans always come up against practicalities. Buying individual properties is very labour-intensive, but building a new block of tenanted flats - so-called 'build to let - involves development risk. Ms Barnes suspects little will happen until specialist property companies start compiling large portfolios on institutions' behalf.
Build-to-let seems the most plausible avenue for institutional investment in housing. But traditional housebuilders can sell more profitably to individual buyers, and commercial developers are too short of capital to want to innovate. For better or worse, the institutional buy-to-let boom probably won’t happen for some years yet.
