PRS is certainly a hot topic at the moment, but many may wonder why the ‘private rented sector’ is suddenly being heralded as a potential solution to the country’s housing crisis.
It’s partly because the term ‘PRS’ has been taken to mean more than the literal translation. It has become shorthand for “build to rent”, and with it a potential change in emphasis in the way we do housing in this country. Given how emphatically the status quo has failed to deliver, there is certainly room for an alternative approach.
The chronic lack of supply is well documented, with the industry falling short of housebuilding targets by tens of thousands each year. The new build development that does occur is often skewed in favour of big-ticket, suburban, 3-4 bedroom family homes. In the new build apartment blocks that do get built on brownfield sites in urban areas, you can almost guarantee that the sale price and ultimate rental price will be higher than all of the comparable properties in the area. This has left an entire generation of young professionals who can’t afford to buy and who are then forced to pay over the odds to rent.
There is undoubtedly a demand for new developments that cater for the long-term renters who are looking for a higher-quality, community-focused way of living than they currently receive from the standard model of renting from a buy-to-let landlord. As well as the potential for PRS to deliver a far better living experience for these people (more on this later), the PRS model may also alleviate some of the problems with supply because of its appeal to large-scale city funds.
PRS is certainly beginning to convince institutional investors to put their money into residential property. One example is L & G who have just begun a £250m PRS development in East London as part of a pledge to invest £1bn in the sector. Knight Frank has since predicted that investment in UK PRS will triple to £50bn by 2020. There is plenty of scope for growth, considering the IPF figures that show only 4% of institutional property holdings in the UK are currently residential, compared to 44% in Holland for example.
Although UK buy-to-let property has, in general, offered excellent returns for the last few decades, the management-intensive nature and the difficulty of exit have put off the major city funds. The buy-to-let market has historically been made up of individual portfolios which are too small to invest in, or if grouped together with other portfolios would be nigh-on impossible to manage efficiently.
A purpose-built PRS block of, for example, 100 units would offer greater scale and better control. Add that to a whole host of similar developments managed by the same operator and you’ve got a group of income-producing assets large enough to interest a fund. Today’s low-interest-rate is another factor that makes this kind of investment look appealing because fixed-income returns can easily be bettered by the PRS market.
The very same principles have driven a vast amount of institutional investment in student accommodation in recent times. PRS already dwarfs the size of the student market, and institutionally has the potential to overtake student housing in a matter of years. This is still merely potential though. It remains to be seen whether the muscle of major institutions and the cumulative effects of a housing shortage will be enough to see PRS make an impact. The vagaries of planning law and the inflexibility of the major housebuilders are two potential reasons why not, but there is absolutely no doubt that there is a great incentive for PRS developments to be built on a large scale.
The demand is most certainly there. Manchester is a prime example. In just 10 years the number of 20 – 39-year-olds in Manchester has risen from 78,301 to 123,600, which has driven an 85% increase in PRS take-up during the same time period. And yet there are still no completed purpose-built PRS developments in the city. There are many in the pipeline, but demand is likely to outstrip supply for years to come.
What exactly are the new generation of renters demanding? In short, somewhere that feels like a ‘home’ where they can live indefinitely without the need to actually buy the property. A purpose-built PRS block is more likely to deliver this than a standard new build development because – in the most simple of terms – a PRS building simply has to deliver high living standards and a sense of community, otherwise it will be less profitable.
The same is not true in the case of a regular new build where the brief is simply to sell units by a certain date. In an era when so much new build stock is snapped up by buy-to-let investors who need not even set foot inside the property they buy, how the community might interact or how the units themselves stand up to years of use is basically an irrelevance to the developers.
PRS is a great opportunity for innovative design to marry-up with top-quality day-to-day services to give a nicer living experience than most young professionals currently receive. To use our own model as an example, we are set up to both develop and to operate these buildings via our sister firm, Gridizen. Even the best-designed building can offer a poor living experience if the operator is dropped in as an afterthought, so in order to ensure joined-up thinking from the beginning, we are able to combine the two functions.
The ideal for Gridizen is to deliver a living experience more akin to a hotel than a standard apartment block. New Gridizen residents automatically sign up to an app that provides them with a range of services, i.e. maintenance & IT support, the booking of entertaining space, grocery deliveries, special offers from local retailers, maintenance reporting etc. As well as residents, investors could potentially benefit from the long-term income streams that services of this nature could provide.
Additional facilities like communal office space, entertainment space and shared storage can all be added in at the design phase to make sure the development goes beyond simply providing a roof over people’s heads. More generally, there is likely to be a greater emphasis in future-proofing during the development phase of a building that is ultimately operated by the same people.
Residents may also be able to negotiate more favourable rental terms in a PRS development. An operator may offer a rent-freeze in exchange for a guaranteed tenure of a number of years, while at the same time they could offer empty units as short lets in the style of serviced apartments. Offerings of this nature are subject to the grey areas that surround ASTs and alternative rental terms, but when one operator is responsible for an entire block, there is likely to be greater flexibility for renters than the current model of renting one unit from a private landlord.
The potential of PRS new build is abundantly clear. Successive governments have given their backing to the concept and have even gone as far as pledging £4.5bn towards PRS projects during this current term. Publicly there appears to be the will from all relevant parties for PRS to make a serious impact on housing in the UK, and as this article has discussed, the demand is obvious. But the question is this: will housebuilders raise enough financial backing to build for the long-term rather than the short-term, and will there be enough co-operation from the authorities at the planning phase? It’s now up to the industry and the local planning departments up and down the land to make the PRS revolution happen.
Author: Kamran Mahmood of PRS Invest