The Private Rented Sector ("PRS") has become an increasingly significant element of the UK housing market, and it is a trend which is showing little sign of abating. In July 2016, the Department for Communities and Local Government published its English Housing Survey Private Rented Sector Report 2014-15. It was found that 19% of all households, or 4.2 million in England alone, are now privately renting. The equivalent figure in 2004-05 had been just 11%. PRS has overtaken social renting as the second most common form of tenure after owner-occupier.
The perceived reasons for this growth are diverse:
- From a purely economic perspective, for many people their personal finances simply do not permit home ownership. The Nationwide reports that a typical home in the UK now costs six times the average annual earnings. The tightening of Loan to Value ratios offered by lenders, and the resultant increase in the level of self-financed deposit that has then been created, has made home ownership a much more (often enforced) long-term aim. This is most likely reflected by the suggestion that 70% of private renters are aged 45 or below.
- Within that same demographic, the PRS also accounts for a large proportion of student accommodation. Participation in higher education has been steadily growing, notwithstanding the imposition of increasing tuition fees. In turn, student housing has been seen by private landlords as an attractive investment, particularly with the conversion of owner-occupier houses into Houses in Multiple Occupation, with a regular stream of tenants.
- Private renting provides much greater freedom, enabling mobility and flexibility, not least in the pursuit of employment opportunities.
- It has also been fuelled by the greater demand for homes flowing from immigration, and particularly the free movement of workers within the EU.
As with many other imponderables posed by Brexit, this latter factor will likely become less important after the anticipated departure from the EU in 2019, but there is no reason to consider that there will be a marked reduction in wider demand for rental properties. Instead, the RICS predicts that a further 1.8m rental units will be required to meet likely demand by 2025, thus in just nine years' time. This then needs to be placed into the context that rates of house building generally are already falling far short of target, and have been for some time.
This demand (both current and future) has attracted institutional investors, looking for large scale projects with predicted stable income streams. These are, though, mostly build-to-rent schemes, which will have an appreciable impact on the quality and standards of accommodation, as well as reducing the property shortfall, but will take a few years to come to fruition. But the large corporate investors are already acquiring sites throughout the UK, the target demographic quite clearly being the so-called 'Generation Rent' and, in particular, the 25-35 year old young professionals requiring high quality/specification accommodation in inner city areas
In the meantime, the PRS sector continues to be dominated by private individual landlords. A Government survey in 2010 about the PRS found that 89% of landlords were private individuals, with the majority of them only owning one investment property.
The financial turmoil that followed events in 2007 and 2008 did not discriminate between owner-occupier and rental / investment properties. We have dealt with large numbers of claims involving Buy-to-Let mortgages that were entered into between 2004 and 2007, and which in many instances appear to have been based on notoriously lax underwriting practices. Burnt by the extent of the difficulties and losses that these mortgages were creating, there was a noticeable constriction (and at times complete withdrawal) in the financing of BTL purchases and remortgages.
However, and over the last few years, there have been signs that lenders are beginning to explore that market once again. The number and availability of BTL products is on the increase and, whilst no doubt chastened by the memory of recent experience, the exposure of lenders to investment portfolios has started to rise. This is despite the March 2016 budget imposing a 3% Stamp Duty Land Tax surcharge on the acquisition of second properties, which will be more of a deterrent to those thinking of creating small portfolios comprising one or two properties, rather than those for whom rental is the primary source of income. With home ownership falling consistently and property values holding firm, the direct of future travel is clear – PRS is here to stay and is likely to continue to be the most rapidly growing form of housing in the UK.
So what does this means for surveyors and other property professionals?
Memories can be short, and lessons learned from one financial disaster forgotten, leading to a repetition of the same mistakes. The crash in the early 1990s followed a boom period in the 1980s; less than 20 years later the cycle was repeated. With that in mind, and in anticipation of an increase in instructions for investment valuations (both as to capital value and rental), it is worth revisiting some of the key lessons from the most recent raft of claims:
- Be clear as to the valuation methodology that is required by the client, or else has been utilised in the final report. Assessments on a straight comparison methodology can be very different to those on an investment approach (rent x yield).
- Clearly record any special assumptions that have been made in the appraisal, so there can be no confusion or later cause for complaint.
- Exercise caution about the veracity and source of information relied upon in the valuations, particularly around rental income and prices within new-build developments. Restricted markets can often end up being dominated by a small number of landlords, who in turn become the primary source of evidence.
- Be wary of potential saturation of the market, and predicted oversupply which could impact upon future capital value.
- Consider whether valuations within a specific sub-market are sustainable more generally. A prime example includes properties converted for student accommodation, as compared with the equivalent owner-occupier units.
Outside the sphere of valuation, there may also be issues for those engaged in site acquisition advice, planning, design and project management as the dash to meet the raging Build to Rent demand from the Generation Rent. Site selection is paramount, as is the quality of the accommodation (both within each private unit but also the common areas) and site amenities offered to the whole 'village'. Time is also a key factor and, with construction skill shortages and demand currently far outstripping supply, there may well be rapid growth in the use of off-site, modular forms of construction.
This is, of course, a relatively infant method of building and may well result in problems for professionals engaged in this process, if only due to its newness and the 'just in time' style of arrival on site. Of course, this will present a whole series of different challenges for those tasked with providing advice on value, be it gross development, residual site or post-completion overall site.