UK Mulls Private Rental Sector

Experts say the United Kingdom (UK) is drawing into a position where financial institutional investors could help establish and support a Private Rented Sector (PRS) that would encompass …

Experts say the United Kingdom (UK) is drawing into a position where financial institutional investors could help establish and support a Private Rented Sector (PRS) that would encompass as much as 74% of local authorities. So-called Build to Rent developments that would make up the PRS are not the norm in the UK and experts say it would require the assurance of financial viability before it could become the kind of accepted investment vehicle it is seen as in other countries. Many analysts say the PRS model is the only way to meet rising demand in the country, but others say the system won’t be adopted because it should and that it must represent a sound financial pursuit. For more on this continue reading the following article from Property Wire.

Some 53% of all local authorities in England have the potential to support viable Build to Rent developments, and of these 139 or 43% are in areas outside of London, new research has found.

The UK government wants financial institutional investors to invest in the country’s private rented sector and for the first time research has been down into how viable such a proposal is.

The work by EC Harris in association with Hometrack has found that he extent of potential viability increases if you take certain measures that reflect how large scale rented developments are currently delivered in more mature overseas rental markets.

For example, if rental unit sizes are reduced by 10% to align to rent price points, then 67% of local authorities fall into positive land value territory and if a further 5% delivery cost reduction is secured, then 74% of local authorities could potentially be viable locations with a development business case.

It also shows that by measuring local authorities for above average socio economic and demographic demand indicators, further proof can be obtained of a strong investment case for Build to Rent in significant parts of England.

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Some five out of 10 of the viable areas have a higher than average proportion of 25 to 35 year olds, six out of 10 of these areas have better than average employment levels and four out of 10 have better than average rental affordability.

‘Over the last five years, the UK housing sector has gone through a major market correction and the stage is now set to see how the industry responds to very different market conditions. The development market is now grappling with a raft of government policies that are impacting both supply and demand. The opportunity to establish a large scale Private Rented Sector (PRS), delivering a proportion of the UK’s housing needs on a long term basis, has never been greater,’ said Mark Farmer, head of residential at EC Harris.

‘The key to a sustainable PRS market is to overcome the financial viability issues and make long term investment into the sector a natural choice alongside other traditional forms of tenure. It is critical that land, development expertise and investment funding are brought together in a way where everyone is able to achieve what they require and create a deliverable deal map. This represents the value of a sustainable Build to Rent model,’ he added.

The analysis points out that projections about the size and value of a future large scale PRS market in the UK are difficult to quantify. Through adopting modest assumptions, calculations show that an institutionally backed PRS model has the potential to deliver over 75,000 units in the next 10 years, equating to approximately £8.4 billion of stock.
However, there has been significant discussion on whether the UK housing market can nurture and support such an active large scale institutionally backed PRS market like the multi family housing market in the United States, or whether it will default to business as usual with a home ownership driven market and where rented accommodation is the domain of the small scale buy to let investor.

The report also points out that while clamour within the industry for the sector to evolve has never been greater, the reality is that it is impossible to force the market to adopt something simply because it seems the logical thing to do. Furthermore, in a recovering home ownership market, the momentum to initiate large scale Build to Rent might not be sustained.

However, without Build to Rent, the market may struggle to meet the increasing demand for new housing in the UK. Currently there is an opportunity to deliver more housing to meet a wider spectrum of private housing demand and create more choice for local communities.

Since 2011, the market has witnessed some initial PRS activity. This started with some small scale existing stock acquisitions lead by international capital and is now beginning to move into larger scale PRS development and investment programmes.

Currently the open sale market is not catering for the PRS demographic. Some 70% of new homes currently being developed across the UK are three or four bedroom houses targeted at existing owners, whereas apartment construction of one and two bed units slowed down during the downturn and has not returned.

The accommodation required for PRS differs to the majority of current housing being developed for sale. The report explains that a large element of the PRS market is 18 to 35 year olds looking for apartments or flats in urban locations either on their own or as sharers.

‘This research indicates that Build to Rent PRS developments do have much wider potential across England than perhaps previously thought. Although the distribution of viability is skewed towards London and the South East it is not exclusive to these areas,’ the report says.

‘There is a large proportion of the geographic market in England that could potentially be unlocked through creating viability by adopting specific optimisation measures, whilst still robustly testing the investment case,’ it concludes.

This article was republished with permission from Property Wire.


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