PRS, or the Private Rented Sector, has been a popular topic in the property market recently, having taken over from social housing as the UK's second most popular form of tenure. With members of ‘Generation Y’ finding it increasingly difficult to find a footing on the housing ladder and our workforce becoming increasingly mobile and diverse, build-to-rent schemes are being advocated by many as the preferred solution to the UK's current housing shortage.
With this background, discussions on PRS usually focus on large purpose-built blocks, designed to meet the needs of young professionals; with good transport links, communal space and other onsite amenities. These schemes are key to increasing housing supply whilst also creating attractive places to live and offering flexibility to tenants who may not be able or want to take a long term view.
However, commentary on the private rented sector often fails to acknowledge that there has long been a thriving rental market at the very top end of prime residential property. A search on any of the major agents' websites reveals a large number of rental properties in areas such as Mayfair, Kensington and Marylebone attracting rents of between £1,000 and £4,000 a week. As well as individual buy-to-let investors, significant numbers of these rental properties are owned by landed estates or other institutional landlords, several of whom have maintained a rental portfolio for decades, if not hundreds of years.
So, what is the attraction of the rental sector for landlords of prime residential property? Most obviously, for these long term landowners with ‘patient capital’, these properties provide a steady, reliable income stream. With demand often exceeding supply, even at the top end of the market, voids between lettings are not usually extensive. Tenants can move quickly and are able to make swift decisions on the level of rent, given their short term commitment. Although profits can be reduced by building maintenance costs, many of the larger landlords are able reduce the effect of this either by keeping the management in house, and/or by offering their properties for slightly longer terms (for example, 10 or 20 years) and recovering a service charge.
Flexibility is also key. Since the Housing Act 1996, it has been considerably easier for a landlord to regain possession of properties let on assured shorthold tenancies and in relation to common law tenancies, no statutory notice need be served in order to terminate the tenancy at expiry. In addition, a landlord with a portfolio of similar properties can benefit from economies of scale when adhering to the growing amount of regulatory requirements relating to short term tenancies, such as the Tenancy Deposit Scheme Regulations, the recent Smoke and Carbon Monoxide Alarm Regulations, and the ‘Right to Rent’ checks to be required from February 2016.
As well as offering income and flexibility for the landlord, private rentals assist with placemaking initiatives in the wider environment; a tenant paying thousands of pounds a week to live in a property is more likely actually to be living in the property on a daily basis and using the local amenities, such as restaurants and shops, than the foreign investor using his/her flat as a pied a terre for a few weeks a year. This higher degree of physical presence increases the vibrancy of the immediate area and the sense of community, attracting more people to the area and making it a place to be.
Historically, for larger landowners, their private rental portfolio would be spread amongst a number of different blocks, with very few buildings consisting entirely of short term tenants. One of the most important reasons for this was freehold protection, a concern perhaps unique to landed estates and other institutional landlords with all their property concentrated in one particular area. Ensuring that a sufficient number of flats within a particular block are let on short term tenancies is an easy way of protecting the freehold from a collective enfranchisement claim, as there will never be enough tenants on long leases to satisfy the qualifying criteria.
That said, recent years have seen increasing numbers of wholly private rental blocks in prime Central London, perhaps reflecting the demands of a highly mobile and international workforce. To command rents at the highest levels, these blocks tend to offer, in addition to a high spec fit out, facilities such as private storage, room by room temperature controls and an on site concierge service; allowing occupants some of the benefits of a hotel with the privacy of their own flat and the certainty of a tenancy at a fixed rent.
Given the recent slow down in the sales market in prime areas following the SDLT changes last December, rentals allow newcomers to London to live/work here and to experience the lifestyle whilst waiting to see where the market moves before parting with their capital long term. On the other side of the coin, high end PRS developments may well prove an increasingly attractive prospect to investors willing to take a longer term view.