Catering to today’s changing household requirements, the private rented sector is fast attracting interest by large investors as a sustainable long-term investment overseas

South Africa’s plans to roll out affordable mixed-use social housing developments are often in the news. But if international trends are any indication, there is growing demand for, and investment opportunities in, the private rented sector (PRS), too. The UK is one of the frontrunners of the PRS or build to rent (BTR) concept. Traditionally, private amateur landlords, who typically manage one or two properties, own this rented accommodation, the result of buy to let (BTL) or mortgage loans secured in the late 1990s.

But unlike its BTL predecessor, offering units originally intended for the owner-occupied sector, BTR is created solely for the PRS tenant. These include rented properties within bigger developments in convenient urban locations. And increasingly, the emphasis is moving towards purpose-built apartments with tenant-focused lifestyle amenities, with maintenance issues swiftly managed by professional teams.

Knight Frank’s Investor Survey 2015/16 shows that by 2020, large-scale UK investors will triple the UK’s BTR sector from its current £15bn investment value to about £50bn. Primarily institutional investors such as pension and investment funds, these investors will be looking to hold large blocks of purpose-built rental accommodation over the long term – bringing the UK in line with the US and Denmark, where residential rented accommodation is a specific asset class.

GOOD YIELDS

Knight Frank’s survey calls PRS the second-biggest form of tenure after home ownership in the UK, having overtaken the social rented sector there. The 16 large-scale PRS investors interviewed in their investor survey claim to operate off an average gross-to-net yield of 26% for new BTL developments, with variables depending on the location and type of building.

But is rental demand increasing sufficiently to keep pace? It would seem so, if responses from younger property residents are an indication. Knight Frank’s separate Tenant Survey 2015/2016, carried out by YouGov, collates the responses of 5,000 residents of privately rented accommodation in Great Britain. These help to identify key market trends, broken down by region, age group and income.

This tenant survey reports that the PRS is growing in size, with about 5.4-million – 20% of UK households – now being let out to private tenants. There has been a generational shift in the PRS too – more households now live in rented accommodation for longer. While housing affordability is obviously a factor, a key difference is that rented accommodation is becoming an established flexible form of residence. It is particularly popular among younger people.

WE LIKE RENTING

In the tenant survey, 38% of under 35s answer that either they don’t want a mortgage or that renting actually suits their lifestyle. This figure increases to 49% for those aged under 25. The number of under 45s living in the PRS in the UK has also increased to 3.1-million people.

In the UK and elsewhere, private rentals are increasingly being seen not as only a short-term tenure, but as a valued longer-term housing option, with only 24% of tenants saying they would leave the PRS within two years.

LETTING AGENCY OPPORTUNITIES

According to Graham Norwood, editor of Estate Agent Today, an estimated 60% of German adults (24-million households) rent privately. This trend is catching on in the UK. Explains Norwood: “BTR is the institutional investment in building and managing blocks of flats to let – the next big thing in the British residential industry.

“About 9.5-million of those rental units are built and managed by institutions; the financial vehicles used to fund them range from real estate investment trusts to banks, and even some churches, which have funds and housing-related histories.”

According to Norwood, small-scale landlords own Germany’s 14.5-million other rental units – in the mould of the British BTL sector. Germany’s BTL landlords typically handle their own property management. Norwood flags the German BTR sector (where institutions invest in apartment blocks but leave them to property experts to manage) as an opportunity for greater involvement by letting agencies.

Norwood also singles out the US for BTR, or what Americans term multi-housing. “Like Britain, the US is slowly reversing its home ownership trend. A decade ago only 31% of the population rented; now it is 35% and accounting for 43-million households,” he says. “Some 25-million of them are in what we in Britain call BTR accommodation, a figure reached more rapidly than expected thanks to the US housing recession.” When economies are tight, renting often becomes a more practical financial choice over mortgages.

UPGRADE OR DOWNGRADE

If the UK model is any example, bigger investors can eventually reap rewards. Says James Mannix, Knight Frank’s head of residential capital markets: “Our Investor Survey indicates that major investors are working hard to provide fit-for-purpose rental accommodation, which they intend to hold and run for a long period – 71% of investors say for more than 10 years.”

On the tenant side, there seems to be take-up. “Most of the demand in the rented sector is from young, economically active people with concentrations in urban centres. These people view themselves as being relatively transient and renting affords them the flexibility to upgrade, downgrade or move according to their circumstances,” says Mannix.

And as Norwood points out, smaller estate agencies need not fall by the wayside. Far from it, as BTR aims at the mid- to higher-end tenant. So the bulk of renters in the rest of the private sector are likely to lean more heavily on agents for the properties of BTL landlords. Potentially the size of the growing PRS should be big enough that BTL and BTR should easily be able to co-exist.

What the UK’s PRS tenants want

The majority (53%) favour a six-month or one-year tenancy for rented accommodation.

• More than half (52%) of tenants say living close to their work or place of study is a priority. For 30%, their main reason for moving between rented properties is to upgrade to a better or larger property.
• More than one-third (38%) of tenants have lived in five or more rental properties. While the majority moved to within 1.5km of their previous property, nearly 20% moved more than 100km, indicating that they relocated for work or study. This highlights the flexibility of the PRS as a form of residence.
• Nearly one-quarter (24%) of Londoners are prepared to pay a maximum amount of 50% of their gross annual income on rent.
• One-quarter of those living in the PRS either do not want to, or don’t know if they want to, buy a home in the future.

Words Kim Maxwell