Major players are flocking to the private rented sector. Construction News looks at who’s doing what and examines where this increasingly lucrative market is heading.
PRS units in planning construction or completed since Oct 2015_Savills
Are private rented homes the future of the residential sector?
That seems the view of the developers, builders, housing associations, investors and others who are piling into the market.
After a slow start, the private rented sector is suddenly attracting prospectors in growing numbers. The government’s PRS Guarantee Scheme, launched in 2013, has now received applications worth almost £1bn.
Since October, around 9,000 new units have been registered by the British Property Federation build-to-rent tracker, which follows all PRS homes in planning, under construction or completed. It has registered approximately 30,000 in total, dating back around three years.
“There has been a sea change since Christmas,” says BPF director of policy Ian Fletcher. “With lower returns available on commercial property, and with investors keen to diversify because of wobbles in the world economy, there is a growing appetite for PRS investment.”
Over recent months, barely a week has passed without another new player or another new scheme being announced in the PRS market. As with any market surge, there are questions over how long the good times will last. But generally, the mood is upbeat.
So who are the main players in this burgeoning market?
In the private sector there are developers with established PRS portfolios, such as Touchstone, Grainger and US giant Greystar, which moved into the UK market last summer. Greystar is building one of the market’s biggest developments to date at West Greenford in Middlesex, where PRS accounts for around 1,000 of the site’s 3,000 homes.
Patrizia, the German firm which manages 80,000 PRS properties across Europe, is planning its first UK scheme: a 500-unit development in Manchester.
“We see the private rented sector as offering far more opportunity than social rent”
Simon Chatfield, be:here
Grainger, which manages 3,400 PRS homes and has a residential property portfolio across the UK worth £2.8bn, is aiming to become the UK’s leading private landlord and plans to invest more than £850m in PRS over the next three to five years.
Executive director Nick Jopling says: “We have been in PRS for 104 years, but for most of that time we were managing a very different type of property, under the old tenancy rules which regulated rents up until the 1980s. Now though, although we do acquire some existing private rented properties, our focus is on new build.”
Grainger has three new PRS projects in east London, on which Bouygues is the contractor: one recently completed, one on site and one in planning. But although Mr Jopling says London and the South-east commuter belt are the strongest markets, the developer has nationwide ambitions.
Last month Grainger acquired Clippers Quay: a build-to-rent PRS development scheme in Salford Quays, Manchester, worth almost £100m. The project will deliver more than 600 new private rented homes, along with commercial and amenity space.
PRS scheme_Grainger_Clippers Quay_Salford
“In terms of scale, we are interested in 150 to 500 units,” Mr Jopling says. “We have estates of over 500 units, and we have the planning and development knowledge, experience and understanding of how to run these property portfolios.”
Mr Jopling says Grainger wants its product to be “the home of choice for a whole cohort of renters”.
“The term ‘generation rent’ is sometimes used disparagingly – but they are a discerning customer,” he says. “They are young – 46 per cent of private renters are aged 25-34 – quite comfortable with the notion of not owning an asset, they have not settled down yet and renting is an obvious choice for them.”
On the other side of the public-private housing divide – which may become increasingly blurred by PRS – are the landlords of social renters: housing associations, which manage 2.3m of the UK’s 3.9m socially rented households, and local authorities, which run the remaining 1.6m.
Local authorities are eyeing PRS for a range of reasons. Many big councils, including Birmingham, Croydon and Manchester, are now promoting PRS through their specific housing and planning strategies, including providing guidance to developers. Ealing and Westminster have negotiated section 106 agreements where affordable housing requirements were reduced in favour of more homes for market rent.
Estimated growth in PRS units to 2020_British Property Federation PRS tracker
Source: British Property Federation
Some councils have taken a financial interest in PRS. Manchester has invested its own land into a joint venture with the Greater Manchester Pension Fund, known as Matrix Homes, which is investing £24m across five sites. Matrix will deliver 240 homes, half of them for private rent, and will receive a percentage of the rental income.
“All councils are looking to see how they can generate income,” says Sweett director of housing and care Stephen Oxley, who has worked for Sanctuary Housing Group and is now lead consultant to Birmingham City Council’s new PRS company, Inreach Birmingham.
Inreach is wholly owned by the UK’s largest local authority and its first project will shortly start on site. “It is a 92-unit development, comprising a mix of one and two-bed apartments, and is pivotal to the development of PRS in Birmingham,” Mr Oxley explains.
“The council sees it fulfilling several goals: it provides more housing and generates income, and it will signal to the market that PRS can work here if you’re a private developer. Birmingham has its strategic plan for city development and it sees PRS as very much part of the housing mix.”
“There are specific skills in this market, such as understanding demand, managing void rates, and tenant turnover”
Jeremy Blackburn, RICS
The Inreach development was given planning approval last year and Mr Oxley says the search for a contractor has begun.
Housing associations have already dipped into the private housing market by building homes for sale to cross-subsidise socially rented homes.
L&Q, like a number of housing associations, now positions itself as a developer of homes for private sale and rent, as well as for social rent. Last May it set up a new private rented sector subsidiary and brand: L&Q PRS.
“In the long term, we want to become the UK’s leading provider of a sustainable private rented offer,” says group director for neighbourhoods Diane Hart. “We have plans to develop 5,000 rental homes over the next five years.”
“We have 50 years of expertise as one of the leading housing providers in the UK, and a strong reputation as a landlord, developer and investor in local communities, giving us the ideal basis for our private rental offering.”
Designing for rent
A new approach to designing homes has emerged in the growing private rented market, with the Urban Land Institute updating its best practice guide this month.
Grainger’s Mr Jopling, who chaired the publication, says: “The big design difference is that developers are not thinking about the sale value, but about the net rental income. Nobody is paying a service charge. All costs go to the owner-operator.
“We use our facilities management and property management teams to create a building that is efficient to operate. We don’t build high, as tenants don’t pay more [for] a great view. We have as many flat doors per core as possible, because cores are expensive to run.
“The flats reflect what renters what: the layout is open-plan; there is smart metering; the flats are wifi-ready so tenants don’t have to set up an account with an internet provider. If anything breaks, there is an online portal for reporting. We can monitor tenants’ behaviour, and that shapes our approach to how we design them.”
Will housing associations take a similar approach? “We have historically bought home designs off the shelf then flipped them for market rent,” says Poplar HARCA’s Mr Stride. “Now we’re saying, ‘What should the perfect market rent flat look like?’ We’re looking to the US for ideas, where PRS is far more mature.”
The NFB’s Mr Bogle believes PRS homes will be easier to build than social housing units. “Social homes used to have very high environmental standards, which made them expensive and time-consuming to build, but these standards have been progressively watered down,” he says. “With PRS gaining market share, it may ultimately make delivery of housing quicker and cheaper because design standards are less exacting.”
As with Grainger, Ms Hart says L&Q understands that “renting is increasingly becoming a lifestyle choice for those who appreciate a more flexible and hassle-free living arrangement”.
Poplar Housing and Regeneration Community Association (HARCA) in east London is including substantial PRS units in the regeneration of estates it manages, working with private developer partners.
“Our aim is to maximise the number of affordable properties we can offer, so revenue from private sale and private rented homes provides a subsidy for social rent,” says CEO Steve Stride.
Proportion of PRS homes owned by institutional investors in 2011 UK vs Germany and the US_LSE
However, he says the risk profile of PRS will make some housing associations cautious. “With a PRS scheme, where the financial model is based on revenue coming in over 25 years, what happens when the market rents go down?” he asks. “Whereas with private sales, you are in and out, and in London the sales market is still so strong.”
Mr Stride reckons PRS may represent “5 per cent of Poplar HARCA’s development pipeline” over the next few years. “We want a mixed portfolio, of which PRS will play a part,” he says.
“One thing I strongly believe is that estate regeneration is a key way for increasing housing in London. In some cases, we are increasing density by four times on the estates we are redeveloping. PRS is a part of that.”
Poplar HARCA’s redevelopment of Aberfeldy Estate in Tower Hamlets is one of the largest PRS schemes currently on site (see Project Report). Here, it is working in joint venture with Willmott Dixon’s PRS business be:here, with the rental revenue income shared between the two.
Effectively sat in a middle ground between private developers and public housing providers, be:here uses its expertise as a developer and builder and its contacts among housing associations and councils to create a new product.
“We see PRS as offering far more opportunity than social rent,” says be:here operations director Simon Chatfield. “It also offers better margins than contracting.” And if construction workloads in affordable housing start to dwindle, it offers a handy extra revenue stream.
The Aberfeldy project has a complex leaseback arrangement with the institutional investor, but future schemes such as sections of the Old Vinyl Factory regeneration in Middlesex should be much more straightforward, Mr Chatfield says.
Willmott Dixon Gatefold Building Hayes London
“On the Old Vinyl site, be:here bought the land, Willmott Dixon Housing built the homes, we then sold it to the investor, but we continue to manage the properties,” he explains. “That is probably how future schemes will work.”
Will other players enter the market with similar products to be:here? Sweett’s Mr Oxley expects a few “opportunists” will eye PRS, including commercial developers and other social housebuilders.
“It should be quite straightforward for existing social housing contractors,” he says. “Everyone will develop a PRS brochure in the next few months. But the work pipeline may depend on their clients’ strategies.”
One challenge for new entrants to the sector may be unfamiliarity with the property and tenant management demands of the sector.
The Royal Institution of Chartered Surveyors has produced its own PRS letting and management code of practice, which was updated last July. Head of policy Jeremy Blackburn says: “There are specific skills in this market, such as understanding demand, managing void rates, and tenant turnover.
“Everyone will develop a PRS brochure in the next few months. But the work pipeline may depend on their clients’ strategies”
Stephen Oxley, Sweett Group
“We are pleased that bigger players and institutional investors are starting to come into the sector, and a number have approached RICS asking what are the requisite requirements for being a PRS operator. They want to do the right thing.”
To date, the government’s message on PRS has been mixed. It has provided financial assistance to help kick-start the sector (see box).
But as National Federation of Builders policy director Nick Bogle observes: “Conservative housing policy is rooted firmly in owner-occupation and planning is still weighted more towards private sale homes. In that respect, PRS is providing a distraction.”
Chancellor George Osborne’s decision to start removing tax relief on buy-to-let mortgages may provide an unwitting fillip to PRS. “If half a million buy-to-let properties are sold because of the tax changes, as the National Landlord’s Association forecast last month, that’s half a million households who may need to find rental property,” says Grainger’s Mr Jopling.
The BPF’s Mr Fletcher believes PRS can support the government’s other housing objectives. “It will get more housing into town centres, helping regeneration and improving density,” he says.
The looming Housing Bill, with the introduction of Right to Buy for housing association tenants, will further cement the government’s commitment to owner-occupation. However, with subsidies for social rent gradually tapering away and the supply of social rented homes likely to shrink further, that may push more households towards PRS.
RICS’ Mr Blackburn believes the bill will be “controversial”. “The affordable rented sector is going to come under great pressure,” he says.
“The bill will effectively leave it up to the market to decide rental levels, but will private developers extend their risk profile to drop into the market for social renters? They are likely to want to stay within a safe risk envelope. Our position is that we believe in a mixed-tenure policy.”
Is there any reason why the PRS surge might end? “The reason PRS has emerged is because people can’t afford to get on the housing ladder any more,” says Faithful + Gould commercial director Hugh Redrup. “But if the housing market crashed, so more people could afford to buy, that may slow it down.”
In 2013, the government announced a £10bn injection for PRS, with the aim of stimulating interest in the sector.
A total of £7bn was split between a build-to-rent development fund and a rental guarantee scheme for completed properties, with the remainder held in reserve to top up either pot.
Investment manager Venn Partners was appointed to run the guarantee scheme, and its partner Richard Green reported a surge in interest.
“We have had over 200 applications totalling nearly £1bn in value,” he says. “None are approved yet, but we have a couple nearing the finish line. We expect the first bond will be out within the next couple of months.”
Mr Green says the applications range from “£10m to hundreds of millions”, with interest predominantly in the South-east but increasingly from Birmingham and Manchester. Most applications are from housing associations and private real estate funds.
He is keen to stress that the guarantee scheme can “accept applications once they are through detailed planning” even if final completion is years afterwards. “We are encouraging early applications, as we only have a finite amount of capital,” he adds.
Mr Green sees the market “developing at an accelerating rate”. “The applications we are seeing are achieving rental income higher than in their original business plans and renting out units quicker than anticipated. In that respect, we are ahead of expectations.”
However, he says it is too early to say if the scheme’s backing will be increased.
The build-to-rent fund, in contrast, has not performed as well as anticipated. Figures released in August showed development funding provided so far amounted to less than half the government’s £1bn target.
Mr Green points out some developers “prefer to use equity finance rather than debt” and adds that the market for development finance has “warmed up over the last 18 months”.
The BPF’s Mr Fletcher says the build-to-rent fund was “created to kick-start the sector at a time when development finance was hard to come by”.
Now there is more confidence, with major institutional investors beginning to put their money forward. Last month, RBS pledged £1bn for the development of new-build PRS schemes and L&G has announced a similar investment. M&G is providing finance on the Aberfeldy PRS scheme in east London.
Mr Fletcher says he “would not be surprised if the government culls the build-to-rent fund”, but adds that “we are keen for the guarantee scheme to continue past the natural break clause at the end of this year, and have made representations to that effect to the Treasury”.
“In terms of financing, the best comparison for PRS is student accommodation: from nothing 20 years or so ago, that has grown to be a £20bn investment market. We expect PRS will quickly go past that, as it is a much bigger market.”