Barriers to Institutional Investment in Rental Housing: A Systematic Review of Market Risks

Abstract

Housing practitioners and policy experts are advocating for an expansion in rental housing supply in contemporary cities around the world. The objective is to convince institutional investors to include rental housing investment in their investment portfolio to contribute to boosting housing supply. Unfortunately, the rental sector is characterized by numerous uncertainties and challenges, making it unattractive to institutional investors. With the growing attention to institutional investors in various housing market contexts, an understanding of the market risks (also known as barriers), is useful to inform future research and policymaking. Using a systematic literature review methodology, this paper synthesizes the extant literature on the market risks inhibiting institutional investment in rental housing. Findings reveal the following barriers: low profitability, non-progressive rent control policies, unclear target group for rented projects, poor landlord-tenant relations, inadequate property management and unreliable property market information. Among all the barriers identified, low profitability and inadequate property management had great influence on their investment decision. Firstly, institutional investors perceive rental housing investment as less profitable and unattractive in terms of project performance. Secondly, the lack of supporting structures for the property management sector contributes to derailing rental yields. The review also finds that the target group for rental projects are often vague especially for projects under government assistance. The rental sectors in many countries are confronted with numerous problems, some of which greatly inhibit institutional investors from investing in the rental asset. This paper concludes that, although the idea of expanding rental housing supply seems laudable, ignoring these problems may be detrimental to housing markets in the long run. Rental markets in many countries are volatile, and thus not ready to receive institutional investors fully into the sector. An expanded rental sector could be advanced if policy makers take the appropriate steps to resolve the identified challenges. Adequate structural preparations must also be made for large scale rental housing supply.

Perceptions of Young Adults on the Critical Success Factors of the Build-to-Rent Housing Model in Sydney, Australia

“…This review provides an outlook on the potential use of the emerging BTR asset class to serve Australian young adults. Globally, the private rental sector has been encouraged in some countries as an avenue for achieving policy goals, including addressing housing affordability issues, increasing the housing stock, and reducing pressure on public housing [7,26,40]. In many countries, the rental tenure has attracted a lot of funding in private investment [19,40,41].…”

“…For instance, an institutional investor is likely to view BTR as a financial asset, but from the perspective of policymakers, it will be expected to generate social investment returns. The literature covers wide-ranging areas across different countries, including the understanding of the asset class, assessing its financial viability, examining government intervention models, and exploring the barriers [8,26,28,[56][57][58]. A more forward-thinking school of thought discusses it in the light of an affordable housing provision [30,[59][60][61].…”

“…In Q4 2022, 3800 BTR housing units were completed in Australia, with a further 8400 units in the pipeline [23]. The pace at which BTR is advancing has inspired experts to draw linkages between institutional investors and the affordable rental housing supply in Australia [24][25][26][27]. However, there is no clear evidence on whether the asset class could help meet the housing shortfalls [28][29][30].…”

Increase Government Support for Build-to-Rent: Should We Expect Affordable Housing?

“…Several scholars have been precise in their assertions by limiting their expositions to pension funds and insurance companies [19,35], while others have focused their discussions on the rental asset [1,3,36]. Recent literature, however, has shifted the focus to attracting institutional investors into housing markets [22,37,38]. There are, therefore, various views on who institutional investors are and their role in housing markets, and BTR is central to the theoretical and policy debates.…”

“…There is a gap in the literature regarding the conceptualization of Australia's BTR housing model, especially whether it is a private or social investment. While the literature broadly focuses on several aspects of the asset class, such as financial viability, critical success factors, different modalities, and systematic risks or barriers [4,[22][23][24][25][26][27], within Australia's housing policy, little is known about what BTR entails and whether it can provide an effective pathway towards increasing affordable rental housing supply. Using two operational BTR platforms in Australia and stakeholder engagements through interviews, this paper assesses BTR in light of affordable housing.…”