By Victor Alarsa
The PRS is the fastest-growing sector in the UK properties market. It is England’s second-largest housing tenure after owner occupied, 62% against 20%, as shown below:
Source: Alex Bate, Building the new private rented sector: issues and prospects (England), 2017
Since 2010 the private rented sector has provided more than one million extra housing units, against only 94,000 home ownerships as shown below:
Source: Ministry of House, Community & Local Government, Dwelling Stock Estimates: 2017, 2019
This shift towards private renting is driven by:
- The declining availability of social housing.
- Home ownership is becoming less accessible. This trend has been triggered by the tighter mortgage lending criteria and lower maximum LTVs, turning out to be much harder for new household occupiers to buy their own home.
- Rising numbers of students. They are dependent on private rented accommodation.
- Later marriage and increasingly rates of separation amongst couples have favored private rented sector, due to reduced household income in the early adult stages.
- Property prices are climbing faster than household income, limiting property ownership.
- Governments have increasingly looked to the private rented sector to play a greater role in supplying more new build housing.
From an European perspective, the potential for the PRS market to grow in the UK is high. Switzerland, for example, accounts for a PRS ratio of over 50% and Germany over 40% out of the total dwellings, much higher figures than England’s 17% (see chart below).
From an European perspective, the potential for the PRS market to grow in the UK is high. Switzerland, for example, accounts for a PRS ratio of over 50% and Germany over 40% out of the total dwellings, much higher figures than England’s 17% (see chart below).
Another perspective to look at the PRS market is to not only look at the totals in numeric terms of dwellings but the transactions. So, for instance, the chart below shows that the total number of owner occupied dwarves the PRS figure by almost three times, on the other hand, the number of PRS transactions accounts for almost double ownership transactions. The same happens with new household supplied. This scenario shows us that there are higher demand and more liquidity in the PRS market than property ownership in absolute numbers.
Source: Ministry of Housing, Communities & Local Government, English Housing Survey Private rented sector 2016-17, July 2018
While the PRS sector has been growing, it has lacked the scale needed to provide organised, high-quality, and greater volume housing. That can be overcome by the so-called: Build to Rent (B2R) property, which aims to rent out new developments, instead of selling them.
At the beginning of 2018, there were 131,855 builds to rent units across the UK, including 25,665 completed, 41,870 under construction and 64,320 with planning permission.
In London, this figure accounts for 67,117 units whilst outside London 64,738 units1. While we may think that 131,000 is still a small figure for a total market of almost 5 million PRS dwellings, it becomes significant if compared with the 149,000 new private rented households in 2017. The graph below shows us the recent growth of the number of units completed or due to be completed for the last six years.
Source: Build to Rent Q3 2018, Prepared for the British Property Federation2
In addition, this figure is likely to keep growing. Accordingly, the Supplementary Planning Guidance (SPG), published by the Mayor of London, Sadiq Khan in November 2016, proposed the introduction of a ‘Build to Rent pathway’ to the planning system, paving an easier route for B2R’s planning permission.
From the funding perspective, some good news as well. The Knight Frank’s “Multihousing“ research, published in June 2017, estimated an even larger increase in total B2R investment, reaching £70 billion by 2022, up from £50 billion in 2021.
Apart from all the incentives, the developers need to be convinced that the Build to Rent market is as attractive as the open sales market. The commonly held view is that Build to Rent will offer developers less in gross sales value than they would hope to achieve in the open sales market. However, after deductions for marketing and other sales-related costs, the end value of PRS units is similar to open market sales, when using net discounted cash flow (DCF). Besides this, two more reasons to go for B2R model include:
- For larger regeneration sites, B2R model has the advantage of buying cheaper lands plus be benefited by its long-term impact on land price on the surroundings, pushing it up, improving the return on capital employed / internal rate of return (IRR).
- Due to the long-term renting revenue, the exit selling strategy has a much lower risk compared to open market sales. In addition, long cycles mitigate market volatility.
Concluding, the big picture shown above demonstrates that developers should start considering and choosing B2R over open market sales. That will not only favor themselves but everybody else in the UK, increasing housing access as well as the quality and services of the building.
1. https://www.bpf.org.uk/what-we-do/bpf-build-rent-map-uk
2. https://www.bpf.org.uk/sites/default/files/attachments/BtR%20Q3%202018-BPF.pdf