UK private rented sector gains ground
UK home ownership in the UK is falling, with renting increasingly becoming a tenure of choice.
“An Englishman’s home is his castle.” For many, it has also been their pension. But perhaps not for much longer.
Home ownership has long been a widely-held aspiration among UK residents. However, the paradigm is shifting, especially among the millennial generation. So while homeowner rates in the UK now stand at around 60 percent, that figure is falling, with renting increasingly becoming a tenure of choice.
Rent versus buy attractions shifting
Why? A number of factors are behind the trend.
The generations-long urbanisation trend has created a progressive demand and supply imbalance in many of the country’s towns and cities, especially in London and the South East.
“Over the past couple of decades, we have seen significant price growth in city centres, which has made it increasingly difficult for people to afford to purchase a property,” says Nick Whitten from JLL’s UK Residential Research team.
For anyone who has been able to secure a mortgage, servicing the debt has never been cheaper. But with interest rates only set to rise from here, that will change. So too will the impact of the Government’s Help to Buy scheme.
“Much of the first-time buyer market is supported at present by Help to Buy,” says Whitten. “That is an important tool that at some point will be taken away, which is creating some uncertainty about what the market will look like after.”
2) Investment security
Home ownership is not the “safe as houses” investment it was. UK house values have appreciated on average 6.1 percent per annum over the past 30 years, and by 8.4 percent over the last 50 years. The combined headwinds of a shrinking buyer pool, future interest rate rises, the tax change impact on the private investor market and uncertainty from Brexit mean we expect much lower capital appreciation of 2 percent over the next five years, and subdued rates after that.
“Therefore, the motivation to get on the housing ladder to benefit from capital appreciation is perhaps not as great,” says Simon Scott, Head of Investment for JLL’s Residential Capital Markets team.
The UK housing market has long been biased towards the provision of family homes, but this stock is ill-suited to the country’s broad mix of households and more mobile workforce.
“Only 39 percent of households are families with children,” notes Whitten. “The other 61 percent – including the 17 percent made up of single working persons – require slightly different things from their homes.”
In particular, there is growing demand for more purpose-designed rental products that offer the affordability and amenities to cater to the different communities’ lifestyles, and in the locations they want to be.
For instance, the Co-Living Old Oak scheme in West London is a mixed-use building incorporating studio and en-suite rooms, plus a variety of commercial and entertainment spaces to create a work/life hub for a community of young professionals and students.
Meanwhile, in the family market there is interest in more professionally-managed build-to-rent products, akin to some of the U.S. ‘garden family housing’ developments.
“The biggest example in the UK to date is the Sigma PRS REIT, which was seeded in part by Homes England, and is actively acquiring housing to rent,” says Scott. “Given the underlying occupational demand and desire among institutional capital for this type of exposure, I expect to see the launch of other platforms that provide this sort of stock to the institutional market.”
4) Maintenance and service
Historically, the buy-to-let market has serviced much of the rental demand in the UK, but recent tax policy changes have crimped its attractions. Instead, there is now encouragement for an institutional delivery to meet the accommodation need.
“One attraction for renters is the ‘hospitality-lite’ level of service and maintenance that a professionally-managed property can offer, which in many cases is poles apart from people’s historic experience,” says Scott.
The potential for better security of tenure is another draw. “An institutional-grade landlord, with their desire for long-term, sticky income, might be more comfortable with longer-term tenancies than a mom-and-pop style, buy-to-let landlord,” adds Whitten.
Meeting the housing deficit through rentals
As Whitten points out, with only around half the number of homes being built at present to meet the UK’s population growth, there is urgent need for a greater variety of tenures and housing products.
“We can’t rely on the private sector only building ‘for sale’ products to reach the numbers we need,” he says. “The onus instead is on a better-quality rental market, with more build-to-rent stock. If you can satisfy people’s living demands in this way, and they turn to other asset classes for their investment needs, then renting will probably become the new norm for many people.”