Investors looking for fresh ideas on where to invest their allocation to real estate could do worse than look at the nascent private rented sector (PRS) in the UK.
PRS as an asset class is still at an embryonic stage in the UK (huge in the US and Germany) due to the hardened home ownership mentality here. That mindset has been slowly softening, however, as house prices make it near on impossible for first time buyers to get a foot on the ladder and a change in attitudes, especially among the millennial age group (born 1980s) and younger.
The ratio of average house prices to income continues to increase. According to the Office for National Statistics, the ratio of average house price to income at the end of 2020 was almost 8 times.
Sensing the opportunity, capital from institutions and private equity into the PRS has swelled in the past five years. This has largely been focused on build-to-rent towers in cities like London and Manchester, though, tapping into the popularity of urban living among millennials. Not everyone wants to live in apartments, especially once they move into their 30s and start thinking about having families.
Rental homes are in short supply. PRS as a whole comprises around 4 million homes, or 20% of the overall UK housing stock. Larger family rental homes with gardens, one would imagine, are in even shorter supply. Especially given that around 180,000 buy-to-let mortgages are estimated to have been redeemed since 2017 and the ending of taxation benefits.
Meanwhile, the total number of properties completed in the UK build-to-rent sector in a similar period of time is around 62,000 homes, according to the British Property Federation. The supply/demand ratio is heavily in deficit.
This shows the significant potential that exists for high-quality family build-to-rent homes.
It wasn’t a surprise, then, to see PRS REIT report impressive results this week, with strong rental growth figures. The group, which has a portfolio of 4,291 homes, said rental rates from new tenancies showed annual growth of 6.2% for re-let properties and 4% for those properties where occupiers renewed their tenancy.
It would have been disappointed to have raised just £55.6m in an issue on 27 September, below its £75m target, but will use the proceeds to acquire five sites, with the potential for around 500 new homes. Two of the five sites have already been acquired (in Bertha Park in Perthshire, Scotland and Drakelow in Burton upon Trent, South Derbyshire).
Following the raise, the group has increased its target portfolio size from 5,200 to 5,700 new homes. Once completed, these homes are expected to have a combined estimated rental value of around £55.0m per annum, and the company’s gross assets will be approaching £1bn.
Renting is increasingly seen as a flexible and long-term alternative to home ownership, especially among millennials. A favourable supply/demand dynamic and rental growth prospects make a strong investment case for the PRS.
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