Tim Munn, CIO at Swiss Life Asset Managers UK, argues that institutional investors can play a key role in breaking the bottleneck in funding UK real estate, particularly in regions that are often overlooked by investors.
Many UK cities and towns have endured years of underinvestment in real estate, resulting in outdated infrastructure and stunted residential property supply growth. Despite the government outlining increased spending in October’s Budget, the UK’s housing crisis malaise is unlikely to be alleviated by simply relying on the state.
Through partnerships with local authorities and developers, institutional investors have the means to break through this bottleneck by channelling substantial capital into overlooked UK regional areas – where the opportunities offer both appealing long-term reliable returns and substantial social and economic impact.
This is why we have been looking to increase the supply of multi-family and single-family housing in well-connected towns and cities such as Bolton, Stockport and Stoke-on-Trent. Thousands of people in these vibrant centres can afford and are seeking to rent quality homes, but UK and International investors continue to overlook these locations and prefer to invest in major regional centres like Birmingham and Manchester, effectively viewing living strategies through a commercial real estate lens.
Although a national shortage of residential stock is well-known – with one million more rental homes needed over the next decade, but only 300,000 homes in the pipeline –demand in larger centres is already closer to being matched by supply. For instance, 62% of rental demand is currently matched by supply in Birmingham, while both Leeds and Manchester are matched to 44%, whereas underinvested locations are signalling a chronic disparity in supply and demand – only 20% of demand is currently matched in Sheffield and 18% in Liverpool. Consequently, rental growth in underinvested locations has outpaced larger markets, such as Bolton, which experienced a 38.7% increase in rents between 2020 and 2023. Given this, we expect to see underinvested locations outperform as new capital ignites opportunity, leading to yield compression.
To truly benefit the supply-strained communities across the UK, investors must identify the developers willing to work with local and central authorities on ambitious transformational projects.
Tim Munn, Swiss Life Asset Managers UK
All stakeholders to benefit
When viewing less-established residential markets, there is an erroneous perception that investors must accept poorer liquidity, poorer quality homes, lower rental growth, and elevated tenant default rates. However, this perception tends to be driven by a commercial real estate perspective, where investors typically view ‘economically active’ cities as those with the highest concentrations of white-collar workers.
Consequently, despite a desperate need for high-quality residential accommodation, these neglected locations are often overlooked for new investment. Where there is new housing investment across the UK’s underserved regions, most developers have opted to advance the most obvious projects with uninspiring design, a basic specification and poor sustainability features, where the additional urban regeneration and societal benefits are minimal. This does little to encourage individuals and families with higher disposable incomes to remain in and stimulate the local economy.
To truly benefit the supply-strained communities across the UK, investors must identify the developers willing to work with local and central authorities on ambitious transformational projects. However, some developers simply overlook the undertakings necessary to deliver real urban renewal and social impact, as this activity is still reliant on positive engagement with local government stakeholders – which are often fragmented and bureaucratic. For investors and developers, it has proved challenging to act quickly and at scale on this basis.
But while working with local authorities to release the land needed for new development in a less-established location usually takes longer to come to fruition, there are grants and attractive funding packages available to help stimulate development. This benefits all stakeholders – the eventual homeowners, the broader community, the local authorities, developers, and investors. In addition, with such high demand for better quality accommodation in areas where supply is highly constrained, investors are also likely to enjoy sustainable long-term rental growth, as well as robust resale values.
Appealing long-term potential
Encouragingly, after years of inertia, we could be on the cusp of a more concerted effort from the UK government to drive local development – particularly in cities and towns that have been largely neglected for many years. We are also seeing an additional focus on delivering housing with affordable rents, which is essential for communities to retain working people, who will then spend locally.
These transformational developments, where historic heritage buildings sit alongside design-led new builds, will help to ensure neighbourhoods remain vibrant – attracting restaurants, cafes, workspaces, and community hubs. This ‘doughnut effect’ will also encourage investment in further rounds of urban regeneration and placemaking with high social impact.
As evidence mounts of the appealing long-term potential of investing in underserved locations, it is only a matter of time before the public sector looks to accelerate capital flows towards these projects. Local Government Pension Schemes (LGPS) pools will be keen to provide additional support for urban renewal and regeneration within the communities and for the members they serve.
With the clear tailwind of government support, the time is right for investors to help address the real estate shortfall across the UK’s regional cities and towns. We believe urban regeneration and placemaking in underinvested locations offers better risk-adjusted returns to investors and in partnership with local authorities, private capital can transform overlooked regions, meet pressing housing needs, deliver real and meaningful social impact for all stakeholders and lay the groundwork for vibrant, resilient communities.