Investors line up $11 bln for British rental homes

* UK rented private housing returned 8.9 pct in 2012

* Residential returns beat commercial property

* Govt incentives expected to boost investment

By Brenda Goh and Tom Bill

LONDON, April 5 (Reuters) - Insurers and pension funds arepoised to spend 7 billion pounds ($11 billion) on rental homesin Britain in a bet that a shortage of housing and mortgagesproduces a generation of renters rather than owners.

About 30 institutions including British pension funds andAmerican private equity firms plan to develop or buy blocks ofhomes to let, encouraged by stable returns compared with shopsor offices and by government pledges of financial support,property consultant CBRE Group said this week.

They have about 7 billion pounds to invest, CBRE andproperty advisor EC Harris told Reuters, and are attracted bythe 4 percent-plus returns on property, against less than halfthat for the safest European government bonds.

"Things have changed in the past six months," said ChrisLacey, CBRE's head of residential investment. "There's a realneed for institutional money, and it has come at a time when theinstitutions are looking for safe, sustainable streams ofincome."

Housebuilders are completing about 90,000 private homes ayear at present, less than half the 230,000 properties Britainneeds each year to house its growing population, property agentSavills said. Meanwhile, potential buyers are finding itincreasingly difficult to raise the 20 percent minimum depositrequired by most mortgage lenders.

A real estate investment arm of insurer Prudential said on Wednesday that it had agreed to buy 534 residentialhomes from developer Berkeley Homes for 105 millionpounds, the first big deal in recent years by an investor in UKrented housing.

Others planning to enter the market include Oaktree Capital, of the United States, and British insurers Aviva and Legal & General.

"Historically, you end up with a higher return with lowervolatility with residential versus commercial real estate," saidBill Hughes, head of Legal & General Investment Management'sproperty arm.

TEMPTING RETURNS

The total return for UK private rented housing, whichincludes rental income and rises in property values, was 8.9percent in 2012, outperforming the 2.7 percent return fromoffices, shops and warehouses, data from Investment PropertyDatabank shows.

Residential returns are typically higher because the valueof the property rises more than commercial real estate.

Investing in a block of flats is also a safer bet than anoffice tower because of the lower risk of empty space at any onetime, though the higher returns are reduced by the costsassociated with managing a large group of tenants.

"The main problem has been access to appropriate stockthat's well managed at a sufficient scale," Hughes said.

Financial pledges by the British government are also helpingto encourage investors. Putting housing centre stage in its bidto kickstart economic growth, the government said in March thatfunding for developers that want to build rental houses would beincreased fivefold to 1 billion pounds.

If such measures spark deals for thousands of homes at atime, rather than hundreds, then deals will start to stack upfinancially, said Mark Farmer, head of residential at EC Harris.

Institutions will target a rental yield of between 4 and 7percent initially, but that could increase by a third over fiveyears through economies of scale or the addition of servicessuch as laundries and gyms, Farmer said.

There were 3.8 million households living in private rentedaccommodation in 2011/12, the highest level since the 1990s, theBritish government said in February. About 65 percent ownedtheir own homes, against 71 percent in 2003.

"The factors pushing for institutional investment in the UKhave never been stronger," Farmer said.

If there is one stumbling block, it could be Britain'stradition as a nation of homeowners, particularly if mortgageavailability begins to ease because of separate governmentinitiatives to free up lending.

"It remains to be seen whether there will be a shift inmindset away from home ownership in Britain, which the privaterented sector would need to really take off," Farmer said.

"But you have an office market in distress and a retailmarket undergoing great change. Residential is more fundamentalbecause people always need a roof over their head."