Private Rented Sector – an exciting developing market

The private rented sector is growing at a huge pace. A number of recent government initiatives are designed to kick start further stimulus, and investors are buying in to this relatively new asset class.

The annual report of the Department for Communities and Local Government - the English Housing Survey - offers a picture of the state of the nation's housing.  A key finding of the latest report finds that the private rented sector overtook the social rental sector for the first time in 2012-13. 

The private rented sector has become the second largest tenure in England, behind owner occupiers. In 2012/13, the English Housing Survey reports that of the 22.0 million households in England, 4.0 million were private renters in 2012/13.

Growth has been driven by many factors – in particular the tighter controls on mortgage lending, and the simple fact that population growth has outstripped the delivery of new homes for many years. There remains a gap between supply and demand which the sector is helping to fill.

Political Support 

The sector has been growing in profile over recent years, but there has been a push this year by policy makers to encourage investment.

The Government announced in April 2014 that it is investing £1 billion in a Build to Rent Fund, which will provide equity finance for purpose-built private rented housing.

The first recipient of the Build to Rent funding was Centenary Quay in Southampton, which is being developed by Crest Nicholson. More than 100 of the 1,600 unit development are homes in the private rented sector.

For investors seeking to build to rent, public land is being made available for development. This is being co-ordinated by the Government’s agent for public land, the HCA, which has an enhanced role to act as the co-ordinator of land sales across central Government.

The Government last year set up the Private Rented Sector Task Force, a group of property specialists who are working to bring together investors, developers, housing associations, local authorities and policymakers to establish institutional investment as a going concern in the UK.

A new planning regime is now in place which places more emphasis on local authorities meeting housing demand in their areas. The National Planning Policy Framework (NPPF) places an emphasis on local authorities making sufficient provision for housing demand in their areas. Many local authorities are actively exploring how private rented homes can help fulfil this demand.

The London Rental Standard was launched by the Mayor of London in May 2014.  It brings together seven landlord accreditation schemes, which will operate under a single cohesive framework. The badge will be awarded to all landlords and letting agents who meet a set of significant core commitments set by the Mayor. These outline a minimum level of service that renters should expect including transparent fees and better property conditions. 

A growing investment class

The performance of residential property as an investment class is attracting the attention of large institutional investors such as pension and insurance funds. These institutions have traditionally focused on commercial property, but increasingly are now looking at the residential sector with much more interest.

Residential investment offers different performance and risk characteristics, and so can offer diversification. The sector itself is diverse – including for example purpose built student accommodation. The British Property Federation have published a helpful guide entitled Investing in Residential Property which aims to illustrate the range of opportunities which the UK residential sector offers, and which analyses different facets, performance and risks.

A key consideration is that investors in this sector must navigate being responsible for tenants’ homes, with the management issues which flow from that. In some cases they are opting to hand over the management of the schemes to third parties with experience in this area such as housing associations, in order to fulfil these landlord responsibilities and guard their reputation. 

For example the private rented element of the Crest Nicholson Centenary Quay development in Southampton will be sold to and managed by A2 Dominion Group, one of the largest housing associations in the UK. This deal is an example of the key role that housing associations can play in this sector.

Going forward

The number of households in the private rented sector is forecast to grow further.  While the economy is set to gather momentum in the coming years, rising interest rates can only put pressure on those hoping to buy their own home, and thereby fuel growth in the rented sector.

This is forecast to bring exciting opportunities to investors, managers and tenants as standards are pushed up and a wider choice of rental properties becomes available. 

For further information please contact Lucy Smallwood, Partner and Head of the Residential Development team, at lucy.smallwood@michelmores.com.