21 August 2018
Large scale multi-family residential developments have long been part of the US and Canadian real estate landscape, with significant swathes of US and Canadian institutional capital deployed in the private rented sector (PRS) for many years. The years following the global financial crisis saw market conditions across the pond, here in the UK, change such that they now lend themselves well to a rise in this sector. It is little wonder that we are currently seeing such an influx of capital in the sector in the UK, both in London and beyond.
A gap in the market
Talk of the UK’s housing shortage frequently appears on newspaper front pages, and Parliament recently issued a further paper on tackling the housing supply shortage. It is a well-recognised issue and institutional investors, together with their chosen developers/operators, are seeking to close this ‘gap’ through build-to-rent developments operating within PRS.
Recent research by the Resolution Foundation found that “up to a third of millennials face renting from cradle to grave”. The 2016-2017 English Homes Survey found that, for the 2016-17 period, 46% of 25-34 year olds were renting in PRS, a 19% increase in a ten-year timeframe. This is a continuation of a trend first identified in 2012-13 and one that looks set to endure. Many millennials not only accept that is unlikely that they will ever be home owners but also appear willing to pay a premium in bespoke PRS developments in exchange for ‘perks’ such as all-inclusive bills, gyms or concierge services.
With the continued supply/demand imbalance it is unlikely that we will see a drop-off in investment in PRS any time soon. During the course of 2017, investment in build-to-rent increased by 22% to £2.4bn, with 41% of capital derived from US or Canadian sources. The British Property Federation’s statistics for PRS units at Q2 2018 show a total of 124,037 PRS units in the UK; of which 37,454 are under construction and 64,052 are in planning.
In addition, and unlike the purpose-built student accommodation (PBSA) market, the PRS market is not dependent on the presence of a major institute of learning to attract end users. All major cities across the UK appear to be experiencing a surge of investment, with L&G investing significant amounts in Birmingham and ICG-Longbow partnering with SDL Group to invest £250m for the development of more than 2,000 new homes across the Midlands. Certainly a number of our institutional clients have been increasing allocations for diversification into the PRS space, with many PBSA operators exploring how they might apply existing PBSA models efficiently to PRS.
Evolved expectations for rental accommodation
While many institutional investors continue to "[struggle] with the granularity of the management in the private rented sector”, most recognise the shift from passive to operational investment and PRS is seen as a very attractive opportunity for long income investors. These investors acknowledge the requirement for ‘real estate as a service’ and many PRS developer/operators are tying in efficient assets with excellent branding; not just laying bricks and mortar but building a reputation for a superior service – gym, concierge, co-working spaces, communal dining and outdoor areas.
At First Names Group we have seen a real shift in developer/operator attitudes in recent years; the sector now clearly sees its customer as its core ‘asset’. A number of our clients have made customer experience a priority and we are seeing first-hand how it is the added extras, over and above location, location, location, that are enticing renters to part with that little bit more.
Many tenants also believe that the sector offers more stability than historic ‘buy-to-let’ rentals as formal assured shorthold tenancies (ASTs) provide more security and it is unlikely that the landlord will evict tenants for spurious reasons.
PRS rising to the top
Many predict that with PRS investment levels set to increase exponentially (Knight Frank forecasts a total of £70bn invested in the sector by 2022) the sector is set to become a mainstream asset class by 2025. So is PRS king of the new ‘alternatives’ or new kid on the mainstream block? What is certain is that given its current ‘emerging market’ status, together with the high demand, large supply gap and long income streams, PRS is set to be an attractive proposition for investors for quite some time yet.
Paula Thompson is a director with First Names Group and part of our international real estate team. Paula specialises in structuring for the acquisition, development and holding of commercial real estate across a wide variety of property classes.
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