A focus on the private rented sector

Property market opinions- Samuel J Richards – Property Consultant- 

Following on from my last article -Why Property ?  , today I am focusing on the Renting sector.

Referred to as the Rental Revolution, the past 14 years has seen the Private Rented Sector (PRS) more than double in size. Over 10 million people – around a sixth of the UK population – are living in privately rented accommodation. The English Housing Survey recently revealed that nearly half (48%) of households of those aged 25-34 were renting, up from 21% ten years earlier – spawning the title ‘Generation Rent’. Understanding the background of the PRS is key for any investor seeking to gain from it’s seemingly inexorable expansion.

Growth Drivers

‘Generation Rent’ was born of both desire and necessity. The cultural shift in favour of renting has arisen due to the changes in career structures and attitudes. At a time when it is not uncommon to change not only jobs but also city of residence, young professionals have embraced the flexibility that renting offers. Contrary to popular perception the PRS growth preceded the financial crisis. Whilst ensuing mortgage lending clampdown left many with no alternative but to rent the wheels were already in motion.

The necessity to rent has arisen due to affordability constraints. The UK suffers from a structural undersupply of housing at a time of rising demand. The supply imbalance has resulted in rapid house price increases at a time of relatively modest wage growth. House prices in London are at a record 9 times average earnings. For the UK as a whole, the ratio of 5.1 is significantly above long term trends. This elevated house price to earnings ratio means deposit requirements, and mortgage costs as a percentage of income, makes property ownership unaffordable for many. Whilst government schemes such as Help to Buy offered some access to the market through deposit assistance, the Bank of England are enforcing more stringent mortgage affordability checks in anticipation of the inevitable interest rate rises.

The drive towards renting will continue as problems of housing affordability are likely to be compounded by future interest rate rises. The Private Rented Sector is set to grow, especially in urban areas. Job creation is usually city-centric, and tenant surveys suggest young professionals prioritise short commutes. Already increasing competition is resulting in rents rising across the country.

Advice – Empathise with the tenant and be ‘Long Term Greedy’

For those seeking to capitalise on this growth trend I would encourage investors to look to regional cities such as Birmingham, Liverpool and Manchester where yields* are higher. When considering potential acquisitions a central location should be your priority. It is a useful exercise to identify tenant sources and work backwards geographically – being near employment centres such as banking districts, universities, and hospitals will result in high demand and critically no void periods.

When debating whether to buy an apartment or a house the variables are:

Apartments are usually available in more central locations but come with service charge management costs and are leasehold. You can also find modern stock that does not require renovation.

Houses are usually in more suburban areas and are often freehold. You will be responsible for general maintenance and therefore checking the structural quality of the building is critical. Renovation is often required which can be time consuming and costly.

I favour central apartments but carefully scrutinise service charges and lease terms. The rent achieved will usually be higher and the demand for central accommodation is consistent.

Think about asset liquidity. I often speak with investors considering schemes with low entry costs that seemingly promise guaranteed high yields – student pods for instance. Whilst there are reputable developers, I am inherently cautious towards these proposals. Firstly, they are usually cash only and therefore you cannot leverage. Secondly, the guaranteed yields are rarely financially backed and may not come to fruition. Finally, if you  wish to sell the property there is no liquid market. You can only sell a pod to a fellow investor. There may be guaranteed buy back structures in place but exercise cynicism. In comparison a residential apartment purchased near a university campus has a far larger potential buyer pool and therefore may offer capital appreciation also.

Finally, understand that the rental market has changed. These tenants are seeking high quality and central rental options. They have money to spend and will renew their leases if they are comfortable and well looked after. The pleather sofa that comes in the furniture pack may be stain resistant – but take a seat in it and you will realise that it is worth investing in good quality furniture that you would want to use yourself.

In summary, the yields available in the Private Rented Sector are currently far outperforming savings options and the consistency makes the market attractive relative to equity investing. I encourage my clients to buy for income and take a long term view on capital appreciation.

The next article is a ‘How-To’ and will discuss the structures available to buyers in more detail.

For more information visit: www.hewitt-richards.com

*Yield : Rental income relative to property price. £10,000 rent achieved by a property costing £100,000 equals a yield of 10%. To calculate yield simply divide rent by purchase price and *100.

Forthcoming posts:

• Finding trusted partners,
• My thoughts on future trends
• Samuel J Richards

Note: Comments & thoughts are my own and not the views of City Mortgage Solutions Ltd