Rental residential property has ascended to a level of importance among real estate investors due to a growing share of to-let housing properties.

The numbers that show the relationship between available housing and the growing population of the United Kingdom are nothing less than dramatic. The country’s population will increase from 63 million today to 70 million by 2021, according to the Office of National Statistics (September 2012), a stunning 11 per cent growth rate that exceeds the 7 per cent growth measure for the decennial ending in 2011.

This suggests that the UK needs about 225,000 new homes be built each year, notable in that 70 per cent of those will be one-person households. And yet, in 2011 only 113,000 housing completions happened, already short by half of what is needed with the current population. This supply-demand imbalance means the first-time buyer needs, on average, a deposit of £26,000, which seriously limits how many buyers actually qualify.

Which is the primary reason that the UK has a burgeoning rental housing sector. In the past decade, more than 1.8 million new private rental households emerged, raising that share of the total housing market from 10 to 17 per cent in just ten years. The Building and Social Housing Foundation, an independent research organisation, projects that this proportion of housing in the to-let sector will increase to 20 per cent by the year 2020.

For investors, such as those interested in real asset funds, this is a clear opportunity. And fortunately this is well past the talking stage. A legal and financial framework is already in place to facilitate investment in the sector. The two most influential programs are the following:

Build to Rent Fund – Launched in 2012 by the Homes and Communities Agency, this loan fund promotes the construction of new, privately rented homes. The fund was increased already in 2013 from £800 million to £1 billion, as the first group of projects are expected to deliver 10,000 new homes already because the reduction in risk to investor-developers.

Debt guarantees – The Department for Communities and Local Government also supports building new homes for the private rented sector. This is a direct government guarantee on debt that should reduce borrowing costs and effectively increase the number of homes built. It is specifically designed to attract investors who want a long-term return on investment that is stable and not exposed to residential property risk. Borrowers need to demonstrate a solid management structure, a viable exit strategy, suitable asset cover, a clear plan for how debt will be raised and a well-researched understanding of rental demand in the market (while national numbers are robust, areas where employment or student housing are strongest will consequently have the strongest rental demand).

The success of residential housing is nothing new, in both the to-let and for-purchase sectors. IPD, which provides performance analysis in the UK real estate industry, found that residential properties overall outperformed all other real estate categories (retail, office, industrial, commercial) in capital growth and rental value growth between 2002 and 2012. Land investment advisors are always on the lookout for such performance figures.

What has traditionally held back investing in residential markets are the higher operating costs associated with rental properties (e.g., 27.6% versus 7.2% in retail and 8.9% in office properties). This is why some investors instead work in the earliest part of development, such as with strategic land investment funds where land is acquired where housing is needed. These capital growth funds work to get land use designations changed and then create the infrastructure necessary to support housing. The land is then sold to homebuilders who specialize in construction and selling, in some cases to rental-management companies.

No investor should go about any real estate programs without first discussing their interest with an independent financial advisor. The investment needs to fit comfortably within an overall individual financial planning structure.