A new report from international property agents JLL concludes that institutional investors are transforming the renting landscape in the UK.
Over the past decade, the report says, build-to-rent has grown to more than 82,100 homes, 'with new completions rising to account for 10% of annual private enterprise supply and renters snapping up stock at record levels.'�
Small-scale landlords will still dominate
Small-scale buy-to-let landlords don't need to panic: as the report itself says, 'less than 1% of the UK's �8 trillion housing market is owned by institutions. Given the severe housing shortage at this time, housing policy, taxes and government incentives have consistently focused on supporting homebuyers, and to some extent build-to-rent, but unfortunately they have worked against buy-to-let..
What's more, the large professional management landlords have a higher cost base and therefore rely on economies of scale to produce higher returns than can a typical buy-to-let investor, but this means they have to target the high-end of the rental market.
These firms claim to provide a more professional service than do small-scale landlords, but that's open to question. Many responsible buy-to-let investors offer a tenant service that's second to none; it's doubtful that a large management company can respond to breakdowns and repairs '� even out of hours - with the same speed and efficiency that many small-scale landlords achieve.
It's also doubtful that this so called 'professionalisation'� of the PRS will lead to better value for money. Typically, small family housing and student accommodation provided by these large organisations may have all the high-end facilities a tenant could desire, but the rents fully reflect this, and they will always keep pace with inflation more rigorously that will a typical buy-to-let.
The UK Rental Market
The private rented sector in England accounts for 4.6 million (19%) households, almost one-fifth of the total. It compares to 15.6 million (64%) for owner occupied and 4 million (17%) in social housing.
The rental sector doubled in size between the early 2000s and 2013'�14, and has since remained fairly stable around the 9% or 20% level, with a slight fall over the last 12 months. Over the same period private renting has changed in structure, now accommodating a much broader range of households.
The PRS has traditionally housed students and young workers / professionals, most in their early careers and saving to buy their own homes. But now the average PRS tenant is much older and much more likely to be living as a family with children, or even to have reached retirement age, and there is a large cohort on low incomes with government support.
With this change in the structure and size of the rental market came concerns and media pressure as to the security of tenure and safety of tenants. In the past few years, concerns have grown particularly about security of tenure in relation to children at schools, and the quality of rental housing.
The major housing charities and tenant tenant groups have been pushing hard for change, and egged on by media stories pressure on politicians and Government resulted in a pledge to abolish Section 21 evictions and to introduce far reaching rental reforms in the guise of the Renters (Reform) Bill 2023.
A crisis of the government's own making?
According to the JLL report, the current housing strategy of encouraging more home ownership, (and it would seem discouraging small-scale buy-to-let) 'has failed to meet the needs of a changing population. Between 2012 and 2022, the number of mortgaged households in England fell by 3%, while the number of private renting households rose by 20%.'�
No that we are in a new era of more expensive money, JLL think that high interest rates will mean institutional investors will become 'essential to supporting meaningful levels of new supply.'�
These new large-scale investors in the sector are expanding from a predominately multifamily (high-rise) focus, now turning their attention to single family (single houses) rentals. These will be houses for rent on large new estates.
This shift in focus is not untried. The single family rental model has proven a successful formula in the United states which, as JLL says, has similar housing and population dynamics, and lessons have already been learned from multifamily and the broader private rented sector (PRS) in the UK.
JLL says the Government is waking up to the challenge. 'Its Renters (Reform) Bill, published May 2023, is seeking 'to support renters with the security that investors already offer. Further new homes standards mandating energy efficiency will be key milestones in the move to net zero carbon.'�
Given tenant demand, JLL argues that these institutional investors have the opportunity and the advantage of using modern building technologies to produce single family homes that will dramatically outperform existing housing stock, while meeting government guidance and tenant expectations.
The resilience of small-scale landlords
Small-scale buy-to-let landlords will undoubtedly find it tough to keep up with increasing interest rates in a high cost era with new investors coming into the market. But many of the good landlords own outright, and still have certain advantages to be able to provide safe and comfortable accommodation for thousands if not millions of tenants in safe and comfortable accommodation at a reasonable cost.
This is despite claims by Emma Rosser, for example, associate director for living research at JLL who told the Daily Telegraph that:
'We are going to see a shift away from small landlords and that is going to be replaced with large landlords, the professionalisation of the sector.
'This rising tide of investment has been building momentum over the last decade.'�
'We have come from a buy-to-let model where supply has really been built on debt.
'Now, it is going to be focused on equity. That is possible through very large, multi-billion pound pension funds.'�