Building London’s private
rented sector
3 March 2014
Kathleen Scanlon
Christine Whitehead
LSE London Lent term seminar
Some recent headlines
Councils urged to build homes for private
rent Local councils should set targets for building homes
for the private rented sector, says new report (Telegraph 24/2)
A better private rented sector can weed out
rogue landlords for good It's the fastest growing area
of the market, but rented homes are dominated by amateur
landlords. It's time for that to change (Guardian 26/2)
We need rent controls to solve London's
housing crisis Too many essential workers are being
priced out of the capital. Rent controls could address the
uncertainty and unaffordability they face (New Statesman
27/2)
Historic PRS provision in
London: Du Cane Court
Dolphin Square
What happened?
• Post-deregulation (starting in the 1950s)
companies wanted to sell – and did over the
next twenty years
• Owner-occupation grew rapidly with welldeveloped leasehold arrangements and the
possibility of buying long leases
• Tax benefits and other incentives meant
private sector building was almost always
for owner-occupation
• New rented housing provided in the social
sector
Decline and revival
• PRS declined to 11% of total stock in England
by the mid-1980s
• Deregulation of rents in 1988 led to slow
increase in supply
• Owner-occupation for young people badly hit
in early 1990s
• Buy-to-Let mortgages introduced in late
1990s – PRS started to increase quite quickly
• Affordability crisis in early 2000s added to
pressure on PRS
The financial crisis and its aftermath
• Credit and housing markets dried up
• Sellers could not sell; purchasers could not
buy – so PRS grew rapidly
• New construction fell by more than half; while
• Immigration and natural growth increased the
population of London very rapidly
• Crisis of supply with all net growth
concentrated in PRS and among individual
amateur/part-time landlords
• Policy makers looked for more housing
overall and new build in PRS in particular
Figure 1: Housing tenure, London
Compared to USA:
the perception
UK
USA
Individual landlords
Corporate landlords
Most owning 1-5 units (not
buildings)
Dwellings originally built for
sale to occupiers or as
social housing
Owning multi-family
developments
Funded by buy-to-let
mortgages
Amateurs
Purpose-built for
rental
Funded by
commercial loans
Professionals
Current UK policy direction
• Encourage construction of rental
developments
– to provide big investments for institutions,
– allow faster construction on large sites,
– introduce specific features suited to rentals
• Attract more institutional investors
– to bring professionalism and financial stability
• National subsidies specific to PRS
– Build to Rent Fund
– Investor guarantees for debt finance
What barriers must be
overcome?
• Attracting institutions to the sector has
long been the holy grail
• Institutions have argued that yield is too
low and that owner-occupation will always
be more profitable and will therefore
determine land prices
• Has the world changed?
Decision-making by
developers and investors
The developer:
Land price =
gross development value – build cost –
required profit
The investor:
Yield = Income / asset price
Investor’s net income made
up of revenue…
Revenue
Number of units
Rent per unit
Annual rent increase
Yield = Income / asset price
( Yield = Income / asset price )
Voids
…less costs
Average tenant length of stay
Average time to find new tenant
Re-lets
Average cost of refurb between tenants
Cost of marketing
Property supervision, including letting
and running the property
Management
Rent collection
Arrears and bad debts
Repairs and maintenance
Other costs Insurance
Service charge and ground rents
Utilities
( Yield = Income / asset price )
Risks add to required yield.
Some fairly easy to price:
Planning risk
Development
risk
Initial letting
Operating or
management
risk
Add X% (say 15-20%) for land and planning risk
to required returns to developers
Add 5% for construction risk
Little experience with large-scale rental
developments on which to base estimates
Add x% for operational risk to investor model OR
require rent guarantee from AA counterparty
( Yield = Income / asset price )
Others less so
Will investor be able to sell—to ownerExit risk
occupiers or another investor?
Reputational Problem tenants, bad management,
more general issues with PRS
risk
Policy or
regulatory
risk
Will rent control or security of tenure be
reimposed?
(Yield = Income / asset price)
Barriers related to
land, construction and product
• Value of land driven by owner-occupation
• Supply of land (particularly in London) in
the right location
• Local authority policies (Mayoral policies
vs those of boroughs)
• Lack of development finance
Barriers related to yield
• Illiquidity of residential property
• Lack of robust market information
• Management
• Scale of potential investment
Barriers related to investor attitudes
• Predictability of demand into the longer term
• Investors not willing to take
planning/development risk
• Investors’ mandates (industry benchmarks)
• Reputational risks
• Regulatory and policy risks
• Lack of expertise within investment houses
Have the barriers to
investment been overcome?
• Few dedicated new PRS developments to
date—but increasing interest
• Government programmes starting to bear
fruit
• Mayor’s Draft Housing Strategy calls for
5,000 per annum specifically for the PRS
• Possible introduction of covenanted PRS –
but benefit of mixed sites?
• Experience of the early adopters (QDD,
Genesis etc) will be crucial
East Village (former Olympic
athletes’ village)
Stratford Halo
Conclusions
• Many of the barriers reflect very
specific features of the UK planning
system and property market, and
will be slow to change
• Even so, best opportunity in
decades for genuine shift in PRS
provision – but only at the margin
• Champions or first movers will be
key -- many from overseas