PRS is a booming market, but its success need not be confined to London and the south-east. Howard Crocker, managing director of Delph Property Group explains why investors and developers should be turning their attentions nationwide.
In five short years the private rented sector has, according to some calculations, more than doubled in size. Savills now values the sector at £1.29 trn, and there is little sign of a slowdown, even if elsewhere within the housing industry conditions are less certain.
I like to think that Delph was ahead of the curve – we acquired our first rental property way back in 1948. In the intervening half-century we have assembled one of the largest privately owned PRS portfolios in the UK and today Delph has some 1,700 units either in our portfolio or in the pipeline.
Renting in this country has all too often meant paying above the odds for a dilapidated flat with a landlord you can’t get hold of to fix a problem that is the result of under investment. But more recently there has been talk of a rental revolution, with PRS driving the wheels of change. New ideas have energised the sector and competition invariably means a better product.
As more and more operators jump on the PRS bandwagon, there is an increasing diversity of opinion on what form PRS can or should take. I believe PRS can be reduced to a relatively simple formula professionally managed, high-quality apartments in city centre locations with good transport links.
Unfortunately there is a big problem with where the bulk of investment is happening. Developers, both within PRS and the wider house building industry, have, until recently, focused their attention almost exclusively on London and the south-east. This is despite the fact that there is a clearly quantifiable demand for good quality, high-specification rental properties from young professional urbanites. In doing so investors are missing out on great returns.
Delph has had significant success in cities such as Liverpool, Manchester, Birmingham and Leicester, to the point that we haven’t looked at London in a number of years.
The market in London has been overheated for some time now and I firmly believe that the best opportunities for growth lie in cities in the Midlands and in the north, where the increase in good jobs hasn’t yet been matched by a supply of decent rental accommodation. Manchester is a case in point. There’s a huge demand for nice homes in good locations and close to decent transport. PRS is perfect for the city’s growing population of young professionals who want well-located and well-connected developments. In addition to making more homes available to let, the city also needs housing for sale at a price point that makes it affordable to first-time buyers.
Institutional investors are slowly starting to recognise the opportunities in the regions. Their appetite for PRS is clearly having an impact on the ground, with deals now being struck not only in London, but throughout the UK’s major cities.
In the last 12 months, a record number of rental apartments have been built across the country, with an estimated 30,000 units granted planning permission. Around a quarter of the new units are believed to be directly backed by institutional investment and more investors are coming forward.
Being so confident in the future of PRS, Delph has made £500m available over the next five years for development finance for new-build housing projects outside of London. Delph has a long history of providing an alternative to bank funding, allowing house builders and developers to build with secure financial terms and low interest costs, while eliminating marketing and sales costs. Funding models include:
- Forward funding – under which Delph purchases a development before construction has started
- Off plan schemes – offering developers a guaranteed exit route
- Completed stock purchasing – allowing developers to move quickly onto their next project
- Pre-purchase partnering – allowing builders and developers to pre-sell units prior to exchanging on the site.
Delph’s proposition to house builders and developers is one that secures better financial terms through reducing interest rate charges, increasing loan to value gearings and giving access to a wider choice of lenders.
The property industry is clearly still reeling from the decision to leave the EU. Regional house builders in particular are facing an uncertain future and housing projects without finance are now at risk. This is unfortunate since the market dynamics remain essentially the same – that is, poor supply combined with high demand.
Change is the order of the day and house builders must move with the times to survive. The possibility of a housing slowdown looms with some pockets of London and the south-east already at a standstill – but there is a glimmer of hope in the form of build to rent. I believe it is possible to mitigate the impact of Brexit on the housing market by offering small regional house builders and construction firms assistance with an alternative to traditional bank finance.
For house builders and construction firms, the UK’s cyclical property market has typically resulted in a feast or famine existence. All signs seem to suggest that following Brexit, the wheel has taken the first turn in a downward direction.
I think the high-end residential market in London will be knocked back and developers may be forced to look to the regions. There are opportunities outside of London and the south-east and we are confident our success will show them the way in time.