Blog: Is the UK's PRS growing up?
by Scott Fulton | 13 December 2016
Had Napoleon Bonaparte viewed the United Kingdom today, I doubt that his dismissal of our national character would be any less harsh than it was in the Nineteenth Century. However, while we were truly a “Nation of Shop Keepers” then, we are now more likely to be characterised as a “Nation of Landlords”. According to data from HMRC, there were 1.75 million residential landlords in the UK in 2014. Given the boom in the “Buy to Let” market during 2014 and 2015, where 1 in 5 mortgages were for a rental property, the number of private landlords could easily have topped 2 million by the start of 2016.
However, these two million landlords accounted for only five million properties, implying an average portfolio of less than three properties per landlord. That these holdings were likely to have been acquired with leverage, at higher LTVs than were available to owner/occupiers, presented the monetary authorities with a potential systemic risk to both lenders and the housing market if interest rates had to rise and, as a result, house prices fell. This risk may already have come to bear in certain parts of Central London.
The policy reaction to this risk was swift and, according to some commentators, severe. First, several of the tax allowances available to private landlords were removed. Secondly, and critically, a 3% surcharge, via Stamp Duty, was imposed on the purchase of second homes. In combination, these changes were thought to have reduced post-tax yields for private landlords by as much as 400 basis points.
Without explicitly stating an intention, the mood music from Government, despite the change of key players post-Referendum, is that public policy is aimed at creating an institutional private rental sector (PRS) which is capable of developing and managing significant portfolios to the benefit of both tenants and stakeholders. It is also clear, that an institutional PRS will be expected to work closely with the developing scale of the Housing Association sector. At present the development of both is nascent but there are clear signs that it is very much the chosen direction of policy makers, institutional funds and large landlords.
In funding terms, Legal & General has recently raised a further £170m for its Build-to-Rent Fund. Now valued at £1bn, this open-ended vehicle has planning for 1,000 homes with a larger portfolio of purpose-built rental property envisaged. Aberdeen Asset Management raised £115m for investment in PRS in August 2016 and has recently announced its first physical investment. There is considerable interest from UK and international insurance, pension and annuity funds eager to access yield with an appropriate maturity given their longer term liabilities and the changes to their regulated capital. Indeed, increasing credibility is being given to the theory that the UK PRS, as an institutional asset class, could grow significantly as the combination of rental demand, Government support and institutional longer term yield requirements creates a “perfect storm”.
As a result we are witnessing the evolution of corporate providers in PRS at a significant rate. Grainger PLC* has recently announced final results for the full year which demonstrated an increasing focus on emerging PRS opportunities. It has invested £389m in PRS assets as it has exited non-PRS operations in the last 12 months. There is a further £347m of PRS investment in planning and £207m under consideration which, if concluded, would take the company beyond its target of £850m invested in PRS.
As Grainger highlighted, and we alluded to in our Blog of 8th December 2016 (A Quiet Revolution), the UK Government has shifted its previous exclusive focus on home ownership to a more balanced view of the supply of required homes from a variety of sources. While it is likely that Housing Associations will play a central role in the provision of affordable rental properties, it is companies such as Grainger* which will supply the equally important private rental component.
*Capital Access Group acts as adviser