Institutional investors poured £4 billion into Housing Associations last year in a series of index-linked leaseback deals. Twelve months on, we are beginning to see more genuine interest in the private rented sector as a product and an investment asset class. Investment focus has been on London and the South East, where rents naturally link to earnings growth, but we are beginning to see interest beyond the capital.

However, the lack of purpose-built rental blocks has been a key constraint to investors. So far, most of the funds have been sunk into traditional housing developments with new PRS units effectively being flipped from open market sale to private rent.

These developments help to get the critical weight of stock under professional management and create the management platforms that investors are looking to invest in. The market is highly immature and it’s likely to be a number of years before bespoke purpose built PRS product, as promoted by Montague, makes up a bigger share of the £893bn tied up in UK rental property.

The current pipeline of new ‘build to rent’ product, estimated to be £1.2bn in London, will help create scale. Across the regions we are also beginning to see some significant PRS developments come forward in Birmingham, Manchester and Telford. The Government’s HCA Build to Rent programme is also expected to support the delivery of a further £2bn of rental product. All of this will help with the constraints clearly evident in the investment market.

Housing Associations

Government and policymakers have been heavily focused on attracting institutional investment into the PRS sector yet housing associations have been the majority of respondents to recent initiatives.

So far this year, A2Dominion has agreed two deals to purchase apartments for private rent from Crest Nicholson – 46 homes at the Harbourside scheme in Bristol and 102 homes at the Centenary Quay project in Southampton, both using the HCA Build to Rent Fund.

Elsewhere, Fizzy Living, a commercial subsidiary of Thames Valley Housing, brought two buildings to the market, Canning Town in East London and Epsom. They have recently acquired a third scheme in Poplar.

Unlocking hidden value

There is no financial incentive in terms of capital growth for tenants to pay higher rent for amenities and services, confirmed by our recent YouGov survey. Yet we are seeing house builders allocating early blocks to PRS because tenants create vibrancy, onsite visibility and demand for amenities and services, which helps to attract homebuyers and support sales values.

Housebuilders appreciate that a PRS exit strategy is equally viable in net land value terms to open market sales and that PRS adds value on larger sites.

PRS vs market sale

Forward funding improves the competitiveness of PRS against market sale. Forward funding, where an end buyer is identified, reduces risk and removes the speculative nature of development. This de-risking means that less equity is required and more debt can be employed to improve the return on equity.

Also, given that there is no reliance on phased sales to owner occupiers, the delivery of units can be speeded up reducing the length of the project and the duration of the debt requirement. As less equity is used and for a shorter time period, the internal rate of return rises. Where there is market demand and a number of phases of development, this de-risking, reduced equity requirement and project acceleration makes PRS a viable option.

Essential Living

High-rise innovation in the private rented sector

One of the biggest examples of innovation and development occurring in the private rented sector comes in the shape of a 44-storey tower to be built on public sector land in Elephant & Castle in south London.

In an announcement this summer, the Greater London Authority (GLA) awarded Mace and Essential Living the contract to develop its site in Newington Butts. The deal will see institutional investment used to build a large-scale residential rental development. Essential Living, a specialised PRS company, is backed by M3 Capital Partners which has a long track record in long-term residential investment.

The move is a clear demonstration of the Mayor’s support for increasing supply of housing through the private rented sector. It is also evidence that it is possible to develop rental homes within the existing planning framework without the use of restrictive covenants.

Essential plan to deliver 5,000 units of private rental stock over the next decade. It currently has a pipeline of 1,600 units at various stages of deliverability, which demonstrates that there is appetite for investment in the sector and that the private rented sector can compete with market sale.

Taken from
Spotlight: Investing in Rental Britain