Institutionally owned private rented housing
By 2040, we will have seen a structural change in ownership of the private rented sector (PRS). Institutional investors, attracted by the demand backdrop and risk-return profile, are now building a significant amount of new rental homes. By 2040, many more people will be paying rent to a pension fund or development company, rather than an individual landlord.
According to the British Property Federation’s Build-to-Rent Map, institutional investment has so far translated into 22,500 new rental homes across the UK, with a further 100,000 in the pipeline. This is a significant jump from the approximately 15,000 homes recorded as being in the pipeline at the start of 2013.
Figure 1: Completions and pipeline of institutional rental homes, 2017-2018
Source: CBRE Research, British Property Federation, 2018
Most of this pipeline comprises city centre apartments in London and other key cities, including Birmingham, Liverpool and Manchester. However, by 2040 there will be a much greater diversification of homes, both in terms of type and geographic distribution. Today, a third of private rented households have dependent children, so investors such as Sigma Capital are diversifying into building large-scale developments of family homes for rent, including through their £250m PRS REIT.
Institutional investment into the PRS is in its infancy in the UK, but parallels can be drawn with the more established purpose-built student accommodation (PBSA) sector. Since 2014, CBRE has recorded more than £17bn of investment into this sector, which is more than double the level invested into the PRS over the same period. However, the gap between the two has gradually narrowed and is level in 2018, with £1.2bn transacted across each sector. There is also a link between the PBSA and the PRS as graduates, who are used to high quality student accommodation and may prefer to migrate into a professionally-managed PRS development rather than into a home managed by a traditional buy-to-let landlord who owns only one or two properties.
Figure 2: Investment volumes, PBSA and PRS, £bn
Source: CBRE Research
In recognition of the role it can play in alleviating the UK’s structural undersupply of homes, the build-to-rent sector is now receiving widespread support from the UK Government. This will continue to encourage investment. Most recently, the July 2018 update of the National Planning Policy Framework explicitly recognised the sector as a form of housebuilding. This is the first time this has been stipulated in English planning policy and marks a fundamental shift in the planning landscape.
Given the trajectory of investment and growth of the pipeline (which has increased by approximately 20,000 per year since 2013), by 2040 there could be more than half a million rental homes under institutional ownership across the UK, which would be a notable proportion of the overall private rented stock in Great Britain (currently 5.4 million homes). Of course, as the sector gains more support and investors grow in confidence, the growth of the pipeline could be higher still. On the other hand, the recent slowdown in planning applications suggests that this cannot yet be taken for granted.
The good news for tenants is that this investment will significantly improve the quality of PRS homes in our cities. Currently, both the energy efficiency of homes and the proportion of tenants who are satisfied with their accommodation lags the social rented sector. To maximise returns, institutional investors are committed to providing high-quality accommodation that attracts and retains tenants in their developments. By 2040, UK cities will be well on their way to having a professional private rented sector.