Monthly Archives: November 2014

Survey reveals relative rental costs around UK cities

Provincial cities around the UK are providing best rental value for tenants in the private rented sector. Plymouth, Cardiff and Leeds are the cities with the least expensive properties for renters, compared with average local monthly income.

The figures will give investors in the private rented sector a feel for their options, if investing in rental property across the UK. While there are other factors coming into play, such as the local balance of supply and demand, the relative costs of renting in different locations will show how much scope the market may have for future rental increases.

The analysis by insurance provider HomeLet ranks Plymouth as the best value rental location, with a home there costing just 27% of net income in monthly rent. Next cheapest is Cardiff, at 29% while Leeds is priced at 34% of net income. Following in fourth equal are Norwich and Glasgow, where rents are measured at an average 35% of local monthly incomes.

The most expensive location is, unsurprisingly, London, where rents are typically 49% of net income. But not far behind them are Edinburgh and Birmingham, where rents still absorb 47% of incomes, while university cities Cambridge and Bristol are not much cheaper, with rents at 43% of income.
“Our analysis of the affordability of renting in the UK’s major cities has produced some surprising results,” said Martin Totty, chief executive of HomeLet group’s parent Barbon Insurance.

Evidence has been mounting in the greater London area that rents have reached an affordability ceiling in some areas but Totty said the findings show this to be a wider issue. “In some parts of the UK, such as Scotland and East Anglia, where rental prices are now falling or stagnant, the data tells us that renting in some cities in these regions is still stretching tenant affordability.”

Mill Group plans rental housing REIT with crowdfunding

British investment company Mill Group has revealed plans to revolutionise investment in the private rented sector in the UK. A new tax efficient Reit (real estate investment trust) will combine institutional and crowdfunded cash, to invest in rental housing.

The Reit will give several tax advantages to investors. It will also allow smaller investors with a minimum £1,000 stake to invest in rental property. And it will give smaller landlords the option of converting their existing property into a Reit shareholding, passing on the responsibility of property and tenant management to the new organisation.

Mill Group starts with £2 million of its own funds and commitments from investors, and will add £300,000 from crowd funds, provided via SyndicateRoom. An additional £2.5 million is expected to be raised from other institutional investors, while the Reit is expected to list on the UK stock market in the near future. As such, it will present an opportunity for individual investors to buy shares, giving them a stake in the private rented sector without buying directly into their own property.

The Reit will be chaired by Ian Ellis, former chief executive of Land Securities Trillium, who said: “Renting long-term is now the accepted norm for a large cohort of young professionals and new families, and the Mill Residential Reit will provide good-quality, private rented accommodation in attractive locations where there is strong local demand.”

The company has already purchased seven residential properties in London, Bristol and Guildford, to start the investment portfolio. Ultimately, it intends to grow the fund size to around £50 million.

The Reit is an established tax efficient corporate structure already used by many companies listed on the UK stock market, notably those investing in commercial property. Rents are restricted in their investment activities, and must return a substantial proportion of their earnings to shareholders.

Mill Group chief executive David Toplas added: “There is real scope for value to be added through residential development and refurbishment, using the special tax status of a Reit to both acquire and hold residential investment properties in this fragmented market.”

“We recognise the role that crowdfunding platforms such as SyndicateRoom can play in helping businesses like ours to raise finance from retail investors who appreciate the total returns from a residential portfolio and want an easy and liquid alternative to a self-managed, buy-to-let property.”

Recent research from Mill Group suggests investors are now more interested in private rented sector housing than they are in the previously hot sector of student accommodation. Comments provided by 60 institutions suggested 85% were already making investments in residential in some way. Said Mill Group’s Andrew Smith at the launch of the reseach: “This clearly shows investors are more ready than ever before to invest in much-needed rented housing in the UK. They are committing resources to the sector, but progress is being held back by a lack of internal expertise and the limited supply of suitable stock.”

“Accordingly, joint ventures remain a preferred route into the sector, with investors looking for management expertise and comfort in numbers.”

Renters look forward to improved services

Britain’s tenants are largely satisfied with their landlords, though they do feel they could receive more support from them. In a poll conducted by Saga Home Insurance, 77% of tenants rated their current landlord as good or excellent, while just 8% awarded their landlord a poor rating.

The results of the survey seem at odds with government efforts that appear to be focused on adding layers of additional bureacracy, in an effort to do away with “rogue” landlords. And they demonstrate that tenants are ready for the enhanced level of support services being promised by the emerging professional private landlords, backed by major investors.

However, despite the high levels of satisfaction, there remain issues where UK landlords are falling short in the service they deliver. Around a quarter of tenants cited poor communication from landlords as a problem, while 21% complained of poor quality workmanship from trades people employed to fix problems with their properties.

For landlords, the survey found their biggest gripes with tenants were late payment of rent – 37% cited this – and damage to property, with a 32% score.

“In the age of housing shortages and escalating rents, landlords have been getting some bad headlines, but the research shows the extent to which this portrayal is unfair,” said Saga’s head of home insurance, Sue Green. “The vast majority of landlords are conscientious and ethical, although tenants do believe more can be done which is why we have released our guide with practical tips to help them improve their ethical credentials.”

Saga has produced a free guide for those renting a property, entitled Being an Ethical Landlord.

Delivering the right product is the challenge to successful PRS investment

Dr Tim Harvard, director of professional services UK at Estate Master, sees excitement – but also challenges ahead – in developing an investment grade product for instutional investors in the private rented sector:

Delegates at the recent RESI2014 could have been forgiven for thinking that there is only one game in town as far as residential property goes – PRS, the private rented sector. Session after session focused on the sector.

You might, quite rightly, think that the UK has had a private rented sector since the year dot. It is a sector that has grown in the last 30 years since the demise of the council house sector and is dominated by myriad small, buy-to-let investors building a little property empire or a private retirement fund. Well this is NOT what is strictly meant by the acronym PRS as it is currently being used. What someone talking about PRS today means is the provision of relatively large private sector housing schemes funded and owned by institutional investors – pension funds, life assurance and property companies.

Historically these organisations have not invested in residential property, making the UK almost unique in the developed world. In the US and continental Europe, residential property is an important component in investment portfolios but not here.

So why not?

The reasons are down to investment quality and cost. Residential investments are management intensive, they involve lots of small, often short-lived tenancies that the landlord has to constantly keep on top of.  There are numerous outgoings that the owner has to bear, some but not necessarily all, which have to be recovered from the tenant. Providing this level of management is expensive, particularly when compared with a commercial investment. What generally barred institutional investors though was the quality of the income stream; private tenants tended to be from low income groups making rent arrears more likely. There is nothing an institutional investor likes worse than an expensive to manage investment with an uncertain income stream.

So what has changed?

Essentially the country has. There have been some very profound socio-economic changes over the last 20 years. A big clue can be found in the level of home ownership. Having increased constantly throughout the last century, this one has seen the level of home ownership start to decline. Partly this is due to a rising population and a shortage of supply (we probably never will build enough to satisfy demand) but mainly it is down to a lack of take up by the young professional demographic group.  Often it is because they simply cannot afford it, this is a group that are going into relatively well paid jobs but carrying huge levels of student debt. Combine this with supply constricted house prices and the chances of getting onto the property ladder where the jobs are minimal. The second reason is, however, this group often do not want to buy. A job or career is not for life any more, the professional job market is fluid, short term, insecure. A young professional often needs to be footloose – and owning property ties you to one location.

So suddenly the game has changed. Certainly there is still the need to build houses for owner occupation but these will primarily be for older, more family orientated people. The major need to be met is for a relatively demanding, relatively affluent (ignoring the long term debt), footloose and educated population who want good quality, well located, well specified, easy to manage rented property close to centres of employment. Serving this demographic is far more attractive to an institutional investor, particularly since the future of some of the traditional stars of property investment – retail and offices – is so uncertain given technological change.

This type of scheme appeals to the Government too. They know the provision of housing of all tenures needs to increase but they are not willing to pay for it themselves, the public finances simply cannot stretch to this type of thing, nor are they willing to liberalise the planning system to free up the supply of housing land as voters would soon react to such a move. The idea of the big financial institutions bearing some if not all of the cost is very attractive, even though this will only be in terms of numbers, I personally doubt that PRS will make much difference to low-income families trying to get accommodation.

It was clear from RESI2014 that many institutions are showing an interest in the sector but all are coming up against the same obstacle: the type of PRS vehicle they need to invest in does not yet exist in the UK. It will, therefore, need to be developed.


Dr Tim Harvard is director of professional services UK at Estate Master

Dr Tim Harvard is director of professional services UK at Estate Master

Surely an apartment is an apartment?

Well actually no, the type of residential property currently being developed for, say, the owner occupation or buy-to-let investor is often not suitable for an institutional, long term investor. Technically, the product produced must be good quality but it also must be made of durable materials that will last tenant after tenant. The building management systems must be designed from scratch for ease of operation to reducing labour inputs and costs.

In investment terms too, what needs to be created is unlike anything the UK investors are used to. Firstly the financing tends to be in two phases; that for the development and then to fund the long term investment. This is not unusual in development but adds complexity to the appraisal. Secondly though, the investment created is going to be quite alien to a UK institution and is going to be difficult to accurately appraise. We Brits are used to commercial property with long, clean, full-repairing and insuring leases and long periods between rent reviews. PRS investments will have a long life (20+ years) but will involve large numbers of small tenants on shorter leases, subject to voids, extensions, annual reviews that will get out of phase, the expenditure and recovery of a variety of costs, as well as having a management overhead in place to keep everything ticking over and growing.

It is no surprise that many developers and investors have brought in US personnel used to working with this type of investment in the States to assist them in planning their schemes. Investors and developers will, however, also need robust and flexible appraisal models for both the development and investment phase of their projects. We at Estate Master know that we can provide this; our DF and DM suite are ideally suited to modelling projects like this whilst our IA (Investment Appraisal) software was designed for the complex, long term, non-standard investments that PRS will produce.

In the meantime though, PRS is an exciting new world for the UK property industry. Many of us may be uncomfortable with the changes in our society that has brought them about but change, like death and taxes, is inevitable. It is how we tackle change that is the key to whether we make a success of this new world.

Notting Hill Housing launches PRS brand

Housing association Notting Hill has launched a dedicated private rented sector brand. Folio London will be taking over the organisation’s private rented housing business, which first began in 2007.

The move comes as an increasing number of housing associations are weighing up their options around market rental. The association joins Thames Valley Housing, which operates Fizzy Living, in having a dedicated – and separate – brand. Fellow housing association A2 Dominion is also preparing to launch a fresh brand, Fabrica, to take forward its market rent and build for sale activities. As registered charities, housing associations are generally focused on creating subsidised, “affordable” housing, but as sources of funding, such as government grants, reduce, they are increasingly looking at other ways to create funds to support those core activities. A profit made from rental housing can therefore be judged as a relevant way to support further construction of affordable housing portfolios.

Notting Hill has said that a project in Marine Wharf, Surrey Quays will be the first development under the Folio London name. The housing association will be developing and managing 374 flats for private rent in a partnership development with Sellar Design & Development, though the first flats will not be available to rent until 2017.

Folio London will take forward Notting Hill Housing's PRS activities

Folio London will take forward Notting Hill Housing’s PRS activities

“It’s important that we distinguish our offer in London’s very competitive private rented sector,” said NHH chief operating officer, Andy Belton.

“Our approach is straightforward – there’s no hard-sell from our dedicated team as we don’t work on commission. Early next year we will add web services for existing residents to report repairs and make payments.”

Belton noted that Notting Hill is no newcomer to the PRS: “We set up our private rent business seven years ago and today we have a portfolio of 800 homes. Depending on market conditions, we will add up to 1,000 new private rent homes in the next five years, from our overall development pipeline of 7,000 units.”

Invesco says UK rental market promises strong investment returns

Institutional investors are ignoring the residential market in the UK at their peril. The sector has continued to outperform other asset classes, according to a new research report from Invesco Real Estate, and presents good opportunities for investors as the market grows.
The opportunity is laid bare in a new report from Invesco, harnessing the power of its global research team in a H2 2014 European Market Outlook. The report reviews all types of property investment, from retail to offices, industrial and hotels as well as residential; and sets the opportunities in each market segment against one another and against peer country markets.
The report reckons the UK private rented market to be worth around £990 billion, making it the third largest residential investment market in Europe, at the moment. “Our research shows that despite rented being the fastest growing tenure and the highest performing real estate asset class in the UK, less than 5% of rented housing is owned by institutions,” says the report.
With more institutions entering the market, it is likely to become more transparent, and more liquid. Overseas investors are likely to head to the UK, as existing stock in Germany and Holland looks relatively expensive. And, with the UK population set to grow, and no apparent political will to solve the supply shortage, demand will remain strong.
Invesco says the fundamentals are good. “Forward funding development to create the stock, with the focus on the strongest markets of Greater London, the south east and major UK regional cities, should generate strong returns.”
“We forecast that capital growth should be strongest in London and the south east, where the shortfall of good quality PRS is at its greatest.”

Numbers renting set to rise substantially as markets lock them out of home purchase

The number of households renting is set to rise by 1.2 million over the next five years, to more than 6 million in 2019.
Two thirds of under 35s will be renting, while an older age group of ALFs – asset-less forty-somethings – will become a major renting phenomenon. These are some of the predictions laid out in a new research report on the private rented sector, delivered by Savills.
London is where the most acute changes will be seen. Private rented households in the capital are expected to rise by 250,000 to 1.24 million by the end of 2019, more than a third of all households. In contrast, the number of owner occupiers is set to fall; while the numbers in social rented housing are expected to see a very modest increase overall.
The number of ALFs is set to rise by 30% over the period, this growth in a group that has already doubled since 2001. Such people in the age range 35-49 will typically have few financial assets, and possibly little put away for old age. “There is an increasing number of forty-somethings unable to get on the housing ladder in the current mortgage environment,” said Lucian Cook, responsible for residential research at Savills. Such people are going to become increasingly reliant on their parents for support, despite their advancing years. The only solace in this, say Savills, is that many more of the older generation were in a position to buy their own homes, and end their working lives asset rich.

Grainger and Sigma agree PRS joint venture

Listed residential property company Grainger has signed a strategic partnership with Sigma Capital Group that will see the pair build a major private rented sector portfolio around the UK. The four year agreement could see thousands of new homes assembled for rent, under the Grainger brand, many of them outside London in cities around the UK.

Sigma is already familiar to local authorities as it has three partnership agreements in Liverpool, Salford and Solihull, responsible for delivering a mix of residential and commercial properties. The company was founded in 1996 and was listed on the AIM market in 2000.

“The creation of this strategic partnership with Grainger is tremendously exciting and another milestone development for Sigma as it positions itself as a major presence in the delivery of high quality new homes for the rental sector,” said Sigma chief executive Graham Barnet.

“The partnership enables us to accelerate the delivery of large scale PRS schemes throughout the UK, particularly in England’s major cities outside London. This acceleration of our activities will help further expand the breadth of opportunity with our partners as we deliver on this. The combination of Grainger’s funding ability and asset and property management expertise, and our local authority relationships and development management skills, brings gains to both sides – as well as to our associated partners. We are already appraising our first schemes.”

Back in February, Sigma agreed terms to buy its first London site for a PRS project, at Barking Riverside. The site has the potential to accommodate 318 apartments for rent, in four new apartment blocks. And in November 2013, Sigma agreed a joint venture with Gatehouse Bank to help fund the growth of a private rented sector portfolio.

Grainger brings substantial property management experience to the deal. It has a portfolio of around 4,000 homes the company manages, let under regulated tenancies. In Germany, the company owns and manages around 3,000 homes with a further 3,000 in a joint venture with investor Heitman.

“This agreement leverages both Sigma’s excellent relationships with Local Authorities and housebuilding partners across the UK and Grainger’s proven track record in managing residential property, whilst providing an innovative new avenue for investment,” said Grainger chief executive Andrew Cunningham. “We are at the forefront of the private rented sector and remain committed to delivering high quality new homes, benefitting local communities whilst delivering shareholder value.”

Home shortage needs action on every front to beat NIMBYs

Brave, probably politically unattractive decisions are needed, if the UK is to solve its housing crisis and increase the construction of new homes. Garden villages, new towns, construction on the green belt and more centrally imposed decisions could all play their part, according to participants at a strategic housing debate this week.

The worry is that, with an election coming up, few decisions will be taken for the next year. And with politicians desperate to appeal to the masses, strategic thinking may be sidelined for popular soundbites. However, the panellists at the annual strategic land debate agreed the scale of the problem is such that every avenue needs to be pursued. The event, hosted by law firm Hogan Lovells and arranged by the International Building Press, drew together the thoughts of Nick Taylor, head of planning at Carter Jonas; Emma Cariaga, head of residential development at British Land; Bill Hughes, managing director of Legal & General Property; and Waheed Nazir, director or regeneration at Birmingham City Council.

“We’ve had planning by appeal,” said Taylor of the recent National Policy Planning Framework regime. “We have to go back to regional planning.” A macro approach was the only solution, he insisted, as nobody had the commitment at a local level, to take decisions based on the broader good. “It seems to me that’s the only way. We remain a nation of NIMBYs – people don’t vote for growth.”

One exception is Birmingham City Council, where a shortage of land means the authority is taking tough decisions, in order to meet housebuilding targets. Nazir said the city had identified an upcoming need for at least 80,000 homes, but has capacity within its existing boundaries for just 45,000. Having reviewed its local green belt, it saw opportunities to build on those parts of it that are not high quality, attractive landscape – and is now seeking high level approval to do so. “We’re still short of our target,” said Nazir, who is now asking neighbouring local authorities to conduct the same exercise, in order to give up poor quality green belt land to housing development.

Alternative forms of tenure all have a part to play in meeting the demand. Hughes warned that current interest in the growing private rented sector was not a panacea. “If you believe in build to rent, you have to get through the planning system. We’re looking for a new type of product that’s going to take some time to procure.” Nazir said his authority was intervening directly in the market, and is building 1,500 homes for private rent, but noted such projects need a different treatment by planners, in order to help them succeed. “The challenge for us is how you negotiate your scheme.”

New towns, or the less aptly named garden cities, may also help meet housing need, but cannot be delivered overnight. Cariaga, who spent time working on the massive Ebbsfleet project, said that development had stalled due to other areas such as Stratford taking the attention of developers, but its time would come. Panel members wondered why the planning of the new HS2 rail line did not include a new settlement somewhere along its route, as it presented the ideal opportunity to deliver a town with immediate transport infrastructure.

There are also concerns that the current situation in the UK, where landowners can negotiate much of the value uplift due to nearby infrastructure projects such as HS2, was unhelpful. The French system provides for only a modest overage to be paid to landowners, with the balance in the value uplift of sites being subsequently ploughed back into paying for new transport infrastructure. And Philip Barnes, group land and planning director at Barratt, noted during a Q&A session that previous new town settlements in the UK had paid landowners the current value of their land as it stood, not any hope value; the lower cost of the land was a key consideration in helping to fund new developments.

Government support for PRS is substantial, argues Stanford

Speaking at a MIPIM UK breakfast seminar Andrew Stanford, head of the government’s private rental taskforce, outlined the steps government has already taken to encourage the sector. And he had bad news for those arguing for a change in planning regulations.

Stanford said the government had already made a significant commitment to the sector, with the Build to Rent fund and the debt guarantee scheme. “That’s really helped to get things moving,” he insisted. On planning he noted: “Yes, it would be great if all local authorities would embrace build to rent,” perhaps through section 106 flexibility, or getting projects built on their own land. “Do I think the government needs to do more? I think the government is doing a lot already.”

On planning, he had bad news for those calling for changes in the definition of housing developments: “It is not going to introduce a new use class.” But he believed that options such as a 10 to 15 year private rental covenant, or flexibility on CIL or section 106 agreements, were the answer. “I genuinely believe we are making a difference.”

Stanford was responding to questions at a debate organised by Estates Gazette and sponsored by Macfarlanes, held at MIPIM UK during October; speakers included Bill Hughes of Legal & General, Elliott Lipton of First Base and Ryan Prince of Realstar.