LARGE APPETITE FROM INSTITUTIONAL INVESTORS
The Private Rented Sector (PRS) or Build to Rent sector in the UK has grown substantially in recent years and accounts for approximately 16.5% of all UK households. In ever increasing numbers investors are buying up properties for the purposes of ‘buy to let’ – benefitting from both value rises in their acquired assets (UK house price rises) and from rising rents. It is clear that PRS is here to stay and will grow significantly over the next few years. How can developers capitalise on this opportunity? What are the key issues you need to be aware of?
What are PRS and purpose Build to Rent developments?
In essence, new housing developments where all the properties are built for rent, not sale. Many believe that in 15 or 20 years time more people will rent in the UK than own their homes. This is caused by a lack of affordable ‘built for sale’ housing stock.
Why has the Built for Sale housing market not kept up with the demand?
The promotion of home ownership in the 1980s, to the detriment of all other housing forms, is now the victim of its own success with more people than ever trying to buy their own home. However, demand for housing has outstripped supply. In the UK it is estimated that 240,000 new houses are needed per year to cater for demand but on average we build only around half that number each year. This has resulted in a housing shortage that has become a ‘Housing Crisis’.
There are several reasons for this … One issue is that the residential market is notoriously volatile and the large volume house builders are working with very tight margins. This has historically made housing developments less attractive to create than other developments in terms of a build to sell model. Another reason is that local government planning decisions often take too long which slow down or prevent people building new homes. Added to this, soaring house prices, especially in London and the South East, has resulted in a huge buy up of UK housing stock by foreign investors.
How can developers capitalise on this opportunity?
Rising property prices and rising rents creates a win-win scenario. These are the key considerations that successful Build to Rent developers should look out for …..
Target the right demographic
The average age of people looking to move into a first home in the UK is between 25-35 years old. The open market is not currently catering for this demographic as most new home developments across the UK are 3-4 bed houses. The 25-35 age group are typically key workers, often young urban professionals, who are looking for a comfortable and affordable place to stay for a secure length of tenure. This group of people will happily live in PRS housing, as proven by the numerous successful emerging schemes.
However they are not the only group for whom PRS would be suitable. Downsizers and students are equally attracted to rental accommodation if the right housing product can be offered. At the other end of the scale, with the prospect of the mansion tax looming, the better off are starting to rent, rather than buy.
Build in the right location
The most successful PRS schemes are in urban locations, with local transport within walkable distance. Allowing for regional variations, a critical mass of 150 units or more is deemed ideal to guarantee return on investment, whether in one building or multiple buildings. Therefore PRS developments are generally medium to high density. Studies have shown that PRS is viable not only in London, but also in locations where there are strong employment rates and lower land values.
Create a sense of place
To attract and retain target group tenants, 25-35 year olds, the right life-style setting is important. Added amenities such as a concierge are part of the PRS life-style formula and this is where PRS distinguishes itself from the Build for Sale sector. Other types of life-style facilities can include workspaces, communal roof terraces and gyms. Additional income can be generated from these facilities, although the prime objective is the contribution they make to place making and community building.
Tenants who feel they are part of a community tend to stay longer. This in turn reduces the risk of rent voids, which have a negative impact on net operating income. Studies show that people who know one other person in a building are 75% more likely to renew their tenancy. For people who know two other people this rises to 90%.
Allow for building management
Effective building management enhances and protects the long-term value of a development. PRS investors are looking for income over long periods. As such, maintaining the quality of a site is important. In addition, communal spaces and services need to be well maintained as they are part of the extended home of the tenants.
Unit design needs to be carefully considered
85% net to gross ratio should be the minimum set for building efficiency. Maximising the number of units per core/floor and the careful consideration of the aspect will lead to a more efficient building. Unit sizes need to be careful considered and related to rental income, whereas personal outside space can be balanced against communal outside space, like a roof terrace. Flexibility in the design layout of the units is important. They should be designed to cater for different modes of tenure, young professionals who are house sharing, or for families.
Use high quality materials
As build to rent developments are designed for long-term investment purposes, the life-cycle of the building materials used plays a much greater role than in other developments. Finishes need to be high quality, robust and designed to last.
Take advantage of Government initiatives
Government and Local Authorities both view PRS developments positively as they benefit local communities by providing much needed homes. To stimulate the sector, the government has initiated a PRS taskforce, which has introduced a £10bn housing debt guarantee specifically for the building of private rented homes. In London the Housing Zones initiative by the GLA is designed to stimulate the process of housing provision. A budget of £500 million has been set aside, as well as favourable PRS planning conditions put in place within the Housing Zones. These budgets are to be used for improving the public realm, place making, infrastructure, building new schools and libraries. These are all key elements that facilitate successful Build to Rent developments.
Do PRS projects stack-up as an investment?
The perception is that Build to Rent developments result in smaller returns than Build for Sale developments. With rising house prices and rising rents, this is increasingly not true. Not only do PRS investors benefit from high UK rents but the value of their assets increases steadily over time as house prices continue to rise steadily. For this very reason, large institutional investors, such as pension funds and property companies are increasingly attracted to PRS as a long term investment vehicle as they are looking for non-volatile, high quality investments offering long term returns. The issue they have is the lack of suitable sites and competition for those sites is high, specialist planning Companies with the right knowledge and expertise are ideally placed to offer investors extremely high returns if they are in a position to have access to those Companies.