Big money investors to transform the lettings market
Build-to-rent investors are champing at the bit, so what will happen to the rental market when they get their teeth into it? Sharon Dale reports.
OH how we laughed when The Young Ones burst onto our TV screens in the 1980s with their grotty student digs and their twofingered salute to hygiene and housework.
That kind of accommodation was the norm 30 years ago but, in reality, there was nothing funny about the damp and the dodgy electrics. Now, thanks to purpose-built blocks of flats, the student lettings sector has undergone a transformation.
Tenants have been seduced by en-suite rooms with all mod cons and traditional landlords have been forced to up their game and compete.
This build-to-rent model, funded by private investment, has proved so successful in the student market, it looks set to spread.
Reports from Jones Lang LaSalle and Savills this week reveal that investment funds and private equity firms are clamouring to buy or lease new blocks of flats to create private rented communities.
These are a common asset class in America and investors believe there is a gap in the market in Britain.
Guy Ackernley, of Jones Lang LaSalle, Leeds, says that European and American operators are keen to enter the market, while 65 per cent of UK fund managers say they too want to invest.
London is a preferred location, though many are now looking outside and have set their sights on key Northern cities, including Manchester and Leeds. Occupancy rates in Leeds city centre are now 98 per cent and demand is growing.
“The sale of Skyline Central 2 in Manchester last summer shows demand for stock moving into the regions, due to the higher income returns and increasingly positive prospects for capital growth,” says Guy, who adds that investors want blocks of 200 to 400 apartments with a return of between 5.5 and six per cent.
The main issue in Yorkshire, is a lack of stock. According to Jones Lang LaSalle, only one development, Calls Wharf, is due to start on site this year in Leeds, while Manchester has six new schemes underway.
“Leeds cannot get left behind,” says Guy, who believes that existing sites with planning permission need to be redesigned and developed specifically for the rental market, with bigger, better flats boasting more facilities and storage.
The Savills report agrees and gives clues on what today’s tenants want. The analysis, aimed at informing the emerging build-to-rent sector, stresses that quality and location are key to attracting and retaining tenants. It also highlights an increasing need for family-sized homes.
The study shows that the desire for better accommodation followed by the need to relocate are the main reasons why tenants move. Almost half of respondents said proximity to work and good public transport links are the most important factor when choosing a rental home.
The Savills report goes on to combat fears that the booming rental market may shrink now that property sales are improving.
Lucian Cook, director of residential research, says: “We have seen a tenure shift towards private renting. The size of the sector has been increasing rapidly since the early 1990s.
There are now 4.14m people renting privately in England and we expect that figure to reach 5.7m by 2018. Despite the rise in demand, the supply of homes to rent remains constrained, particularly in well-connected city centres.”
A YouGov survey for the property firm reveals that in the 2011 Census, a third of renters were aged between 25 and 34. They were closely followed by those aged between 35 and 44. These older tenants are the fastest growing segment, which suggests that people are renting for longer. While the majority of those who rent cannot buy, almost a quarter of tenants choose to rent because “it is less hassle and they like the flexibility”. Savills believe that purpose-built blocks with good amenities could tempt more people to rent as a lifestyle choice.
It suggests creating more spacious accommodation and adds that blocks with nursery provision and outdoor play areas may prove popular with families.
Will Linley, co-founder of Yorkshire letting agency Linley and Simpson, says it is early days for build-to-rent but adds that it could be a positive force in the market.
“There is a shortage of private rented accommodation and I can’t see that changing. A lot of people are now resigned to not being homeowners and the age of first time buyers is increasing, which means people are renting for longer.
“If the build-to-rent accommodation is good quality then it could put pressure on buyto-let landlords to improve their properties. That has happened in the student market and is no bad thing.”
He adds that those thinking of buying to let shouldn’t be deterred by the new providers.
“They seem to be interested in blocks of flats, which is fine, but we are seeing real demand for family houses. If a property is in the right location and is good quality, you shouldn’t haven’t a problem letting it.”