Attracting Large-Scale Private Rented Sector Investment
October 29, 2014
The UK’s housing crisis should not be understated. Not only does it represent one of the biggest potential drivers of inequality in the UK, but failure to address it could sabotage the UK’s economic recovery.
Increasing housing supply tops the priority list of all the major political parties, with the challenge – as set out recently by Labour – is to build 200,000 homes a year, across all tenures, by 2020. In any event, an overall shortfall will persist for another 10 years or more.
The Private Rented Sector (PRS) is clearly an important part of the supply side solution, both in terms of additional housing stock and affordability. The lack of mortgage lending at higher loan-to-value (LTV) levels is reducing the accessibility to ‘buy to occupy’ at a time when the growing population is continuing to put pressure on the chronically undersupplied housing market.
While Build to Rent is a mature institutional sector in both the USA and Europe, it has not yet been established in the UK as a mainstream investment sector. With this in mind, the prospect for greater institutional involvement in the PRS is something that is rightly attracting a great deal of attention.
It is hard to reconcile the fact that residential property, whilst making up around 75% of the value of the UK’s built environment, only accounts for just over 2% of institutionally managed property portfolios. The challenges are real – small lot sizes, high management costs and relatively low yields of 3 to 4% – have proven formidable barriers to institutional investment. But the momentum that has built within Government and the investor community towards navigating these issues, in order to create a flow of long-term capital to the sector, implies that the prospects for success are greater than they have been for many decades.
The British Property Federation (BPF) is the voice of the UK property industry, representing companies owning, managing and investing in property. This includes a broad range of businesses; commercial property owners, financial institutions and pension funds, corporate landlords, private landlords as well as all those professions that support the industry.
In the 51 years since the BPF was first established we have seen the UK real estate investment environment constantly evolve, resulting in fundamental changes both to the overall characteristics of commercial property and the structure of the market.
Within the standard market index, Investment Property Databank (IPD), allocations to alternative real estate sectors, including leisure, student accommodation, healthcare and residential are on the rise, having almost doubled to 9% over the past five years; and this trend is only set to escalate. My belief is that the sectors which are currently called ‘alternatives’ could easily account for up to 30% of the IPD index in ten years’ time, with investment into the PRS inevitably playing an ever increasing role.
Overcoming issues around access to land, planning and affordability have been at the forefront of people’s minds. It is the BPF’s belief that the introduction of the National Planning Policy Framework (NPPF), and the imminent finalisation of the associated guidance, will be greatly welcomed by the industry, as both are widely considered to be beneficial replacements to the previous reams of planning policy, guidance and advice.
The Growth and Infrastructure Act 2013 has also assisted in kick-starting some stalled developments. At the BPF, we do not feel that further large scale reform of the planning system would be helpful at this stage. However, there are some further small changes that could be made to the planning system, to enable schemes to progress faster. The process of obtaining planning permission and readying a site for development can be both lengthy and time consuming – leading to significant delays and associated weaker investment returns and / or uncertainty.
The Lyons Report, which was published in mid-October, has been heralded as “one of the most significant political reports on housing in the last ten years” and it includes some important recommendations for the PRS. For example, it states that the NPPF should require that local plans objectively consider the need for market rented housing alongside that of affordable and market housing, leading to policies that would provide investors with certainty and enable planning permissions in this area. The BPF strongly supports these recommendations, having long argued that investor certainty is a key element needed to unlock investment in large scale Build to Rent developments.
A professionally managed, purpose built PRS provides significant benefits to local economies and so it is vital that national and local policy takes proper account of the objectively assessed demand that exists for this tenure. Planning conditions to secure market rented housing are also welcome, and should give local authorities the confidence to treat such developments in line with their return profiles, in respect of the local infrastructure contributions which they are required to make.
Another important area to address is the quality and scale of accommodation. The PRS remains a cottage industry and, at around 20%, London has the highest proportion of private renters in the UK. However, as is the case elsewhere, the fragmented ownership of the existing rental inventory results in most tenants renting on an ad-hoc basis from agents acting on behalf of individual buy-to-let investors.
It is not unusual for tenants within the same development to rent their property from different landlords and letting agents and then pay their rent to a different property managing agent. As service standards are commonly poor this can cause confusion for tenants in regards to whom they have to call when issues, such as maintenance or common area concerns, arise. The answer to this would be to bring about large scale, purpose built, professional developments that provide a new kind of rental experience for renters, that also can achieve true economies of scale.
Earlier this year, the Urban Land Institute UK’s Residential Council published a Best Practice Design Guide for Build to Rent. The report, which was sponsored by the Government’s PRS Taskforce, sought to urge developers entering the Build to Rent sector to have a clear and committed focus on the end customer. It argues that it is as vital to deliver high quality homes as it is to offer high quality customer service. The Guide also calls for new institutional landlords to embrace the idea that tenants should not just rent their flat, but instead feel that they are renting the whole building through the lifestyle amenities and community facilities offered – effectively creating private rented communities.
But large scale illustrations of this approach are yet to come to fruition and we need to do all we can to support them. The £1 billion Build to Rent fund is starting to make itself felt and it is good to see it being used countrywide, not just in London. The Government has done a lot to support the PRS; now it is up to local authorities to deliver.
Supporting an increasingly mobile and flexible workforce, and significantly improving standards of living and choice, will bring benefits to both the social and economic wellbeing of the UK’s cities. However, for the investor there are still barriers to entry, including the fact that the sector is not yet established, that standards in Build to Rent are not universally adopted and that a scaled up customer proposition needs to be created.
With continued political support, policy stability and some years of patience from institutional investors in the UK, it is growing increasingly likely that the PRS is going to become a mainstream investment asset class of the future.