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SECTOR: PRS
After decades of decline, the Private Rented Sector (PRS)
is undergoing a remarkable period of growth. Rental values
are positive and strong investor appetite has driven growth
of unit availability in urban centres across the country.
Dawn of the
Rental Generation
By
Jack
Simmons,
Partner, Head
of Residential
Investment
T
he main drivers for today’s growth in the Private
Rented Sector (PRS) have been well documented:
high house prices that have proved remarkably buoyant
in some parts of the country even after the 2008-09
crash; a protracted period of flat or constrained incomes;
the severely curtailed availability of mortgage finance;
and the high levels of deposit now commonly needed to
access home ownership.
For young people in particular, these factors have
combined to force a delay in home ownership until later
in life and, for many, to probably make it unobtainable.
With affordable housing generally heavily oversubscribed
and the waiting list for affordable accommodation
approaching 4.5 million people in England alone, the PRS
is now often seen as the only realistic option for tenure.
Changing trends
The trend towards rental has become so marked that it
is bringing about a structural shift in home ownership,
particularly among 25-34 year olds. In 2008, 52% of this
group were in owner occupation, 31% in the PRS and the
balance of 17% in the social rented sector. However, if
current trends continue, by 2020 the position will reverse
and there will be a 51% majority in the PRS with only a
third in home ownership.
Countrywide growth
Growth at the level we are currently witnessing represents
an additional 1.2 million households in the PRS over a five
year period. While this has been concentrated in urban
areas, it is by no means exclusively in London and the South
East. Indeed, we have seen Manchester, Birmingham, Leeds
and Bristol experiencing similar urban growth.
The London PRS market has remained lively with
numerous high profile transactions including L&Q’s £72m
forward funding for the Oaks in Ealing and the £74m
forward funding of Colindale.
However, the stage is now set with a strong focus
on regional cities. In fact, 2016 saw a seminal change
with investors showing a strong appetite for regional
The Private
rented sector
is now seen
as a tenure
of choice
PRS product. While most of this focus has been on
Manchester with its thriving commercial offering and
plentiful product, many 2nd and 3rd tier cities are causing
a stir.
For example, Sheffield’s largest PRS scheme, the
Velocity City 371 apartment scheme, was sold in 2016 to
Addington/Europa Capital for £36.75m. In Bath, a scheme
of 171 apartments was forward funded for L&G + PGGM.
And in Newcastle, the TT Portfolio comprising a 500 unit
PRS sold to William Pears for £25m. Alongside all this,
Manchester City Council and Abu Dhabi United Group are
working on a 6,000 unit scheme in East Manchester.
The HS1 / HS2 effect
Even at this early stage of 2017 we are seeing
increasing opportunities in emerging regional cities such
as Liverpool, Preston, Hull and Derby. All are keen to
attract significant investment to stimulate regeneration
through PRS provision.
Key to the PRS opportunity is the improved connectivity
expected through HS1 and HS2. Birmingham has seen
only minimal PRS provision so far, but it is recognised by
investors as potentially a major PRS location. Interestingly, it
is not just the connectivity to London that is driving investor
appetite, but also connectivity between the major regional
cities. For investors this is an opportunity to create a diverse
portfolio with increased net returns.
Construction industry challenges
A significant consideration for the regions is that
although there is a proven tenant/customer demand for
rental product, and an appetite to commit by investors,
the ability to build the product cost effectively is proving
to be a challenge.
Contractors and developers are devising innovative
strategies to enable quicker and more efficient methods
of delivering PRS schemes. For example, L&G has
established its own construction plant to build modular
apartments and so control both the delivery schedule
and the build quality.
PERSPECTIVES
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SECTOR: PRS