Britain has never been a home for large scale investment in the residential rental property market, not like the United States and some continental European countries where institutional investment and professional management has been the norm. Until now that is.
For over a century Britain’s residential lettings market has been dominated by small scale landlords, traditionally wealthy, but of late the not so wealthy working and professionals who have seen buy-to-let as a relatively safe way to invest for their futures alongside their full time job.
One man band landlords operating in what could be the last of the “cottage industries” in Britain often offer a service to their tenants which is far superior to many of the traditional council and social housing providers.
How many council staff would turn out on a wet Saturday night to look to a tenant’s problem, which many private landlords will do. Perhaps that’s why statistics show that tenant’s complaints in the social sector exceed those about private landlords.
Of course there is a small section of the PRS landlord community operating in the “twilight zone” of grotty flats, beds-in-sheds and run down unhealthy and cold lets, where conditions are far from ideal. These are the poor landlords, some of them rogues that get all the media attention and get the whole sector a bad name – every landlord is then tarred with the same brush.
And of course, for every bad landlord it has to be acknowledged there exist many bad tenants who cause responsible landlords a great deal of difficulty.
But a sea-change may be about to hit the industry: the rapid growth of private renting in Britain has convinced some institutional investors, encouraged by Coalition Government schemes, that there is the prospect of safe investment returns in private renting. Traditionally focused on commercial property investment, in future the institutional investor is likely to be supplementing commercial with PRS investments. The likes of insurance companies and investment and pension funds could be heavily involved.
Their incentive is an explosion in private renting in Britain, with the number of households renting having doubled since 1990 to around 20 per cent of all households. Experts are predicting this could rise to one-third of the market over the next 20 years or so.
The market is still dominated by small landlords and will probably remain so – around 70 per cent of landlords own just one or two rentals – but large scale investors are chipping away at the edges and a start has been made.
It has been estimated that around £30bn of private money is primed for investing into building some 150,000 homes for the rental sector. With companies like insurers Legal and General, developers like British Land, Grosvenor, Essential Living, Fizzy Living and Grainger, plus investment funds like M&G Real Estate behind the initiative, there’s little doubt that a surge is coming in residential development for renting.
Melanie Leech, the chief executive of the British Property Federation told the Independent newspaper:
“The private rented sector offers pension funds and other institutions stable, long-term returns to match the pensions they are paying out. These institutions invest savers’ money for up to 30 years and so are not interested in speculative gain. They need income rather than capital growth and the private rented sector will deliver long-term returns that grow with earnings.”
This view is shared by M&G and Crest Nicholson, on course to deliver 97 apartments at the Bath Riverside regeneration scheme in Bath city centre. Chris Tinker, executive board member for Crest, says, “The sector provides an alternative revenue stream to its core sales business…it allows the company to progress more quickly with major projects so that they get into use faster through a mix of home owners and tenants. Ultimately it secures an improved return on capital employed”.
The level of demand for rented property remains very high, M&G’s head of residential investment, Alex Greaves told the Independent. M&G bought a portfolio of 534 flats from the Berkeley Group in 2013, and reputably has occupancy levels of up to 99 per cent.
Given the potential growth still left in the PRS, and the relatively slow progress that major housebuilding projects make, it is unlikely that these developments will have a major impact on the businesses of most small scale private landlords.
However, introducing high standard, modern and well equipped accommodation with professional management will bring an element of competition for the small scale landlord, wherever these blocks are built. We’ve seen it in student housing with the likes of student accommodation specialist Unite; now the same could be coming to the working and professional rental market.
The booming rental market is under-supplied so there’s a lot of capacity yet to be taken up. This means the prospects for the small-scale buy-to-let landlord are still good. But long-term competition is bound to increase, it should drive up standards and prevent excessive rent levels for tenants. Some small landlords will need to take a close look at their businesses, the standard of service they are offering and future developments in their areas, if they are to survive this coming onslaught.