James Pullan, Global Head of Student Property at Knight Frank, looks at different sectors of the housing market – and the opportunities on offer for investors.
The theoretical case for institutional investment in UK residential property has been building for the last 20 years, underpinned by a slow but consistent shift in household tenure. But the practical case, built largely on the success of the UK student sector, has only recently gained significant traction.
The difference has been a new understanding and recognition of the human factor, demonstrated in the changing mindset of both investors and, crucially, consumers.
Private rented sector (PRS)
The long-term decline in private renting ended in the 1990s. Between 2000 and 2017, the total housing stock in England increased by over 10%, but the share of stock that was privately rented more than doubled.
This shift has been driven by long-term changes in the wider housing market, the economy (especially in key regional cities) and by demographics. All of these have driven consistent, long-term rental growth in residential property.
What does this mean for investors?
Investors are beginning to react to this growing opportunity, especially given current low returns in bond markets.
There are currently around 132,000 units of purpose-built rented accommodation in the pipeline. Half of these have been completed or are under construction, and the other half have yet to start construction. Much of this construction is taking place in major cities, such as London,Birmingham and Manchester, and there are signs of development activity picking up in other locations.
At Knight Frank, our analysis of the key drivers in the rental market, combined with the outlook for household growth, indicates that the sector is set to expand from 5 million households to 5.79m by 2021. As a result, investors will become increasingly committed to longer-term income returns, as opposed to capital value. We forecast that the size of the UK build -to-rent (BTR) market is set to increase significantly from an estimated £25 billion in 2017 to £70bn by 2022.
Student property v residential
Compared to levels of historic investment in UK student property, institutional investment in residential is in a relatively immature position. But whilst each of the three specialist residential sectors (PRS, later living and student) has a specific occupier type, they’re all linked together as occupiers transition through each life-stage.
For example, universities attract young people into regional cities to study, and help keep them there. A recent survey of 70,000 students undertaken by Knight Frank and UCAS showed that 41% of final year students intended to stay in their university city after graduation. The step from purpose-built student accommodation to purpose-built graduate accommodation is obvious, and this separates residential investment in BTR, and other specialist property investment, from the wider market.
Whilst occupier demand for commercial property is finely balanced and in line with wider economic performance, residential investment occupier demand is far less cyclical, driven by individuals who don’t – or often can’t – change their need for certain types of property.
Results from the latest Knight Frank tenant survey, which canvassed the views of over 5,000 individuals currently renting, indicate that whilst 37% of renters are in the sector through choice, 68% of current renters still expect to rent in three years’ time. An estimated 25% of households will be in PRS by end of 2021.
Younger workers especially are taking advantage of the increased flexibility of renting as a tenure that allows them to move between locations without incurring any of the costs associated with buying and selling a property.
Affordability constraints in the sales market are also curtailing some tenants’ plans for house purchase, resulting in a longer stay in the PRS as they save for a deposit. There is also growth in the PRS within the later living market.
Later living
There are currently 11.8m over-65s living in the UK, and this cohort is projected to increase by 20% in the next ten years. Knight Frank’s latest survey shows that some 25% of over 55s would consider downsizing or moving into some form of retirement, or purpose-built, accommodation. This equates to potential demand for this type of housing from a population of over half a million. The gap between current supply and projected demand for retirement housing across the UK is stark.
The PRS is evolving. This is prompting new understandings of what it means to rent and let property. Whilst the last five years have been characterised by the rapid shift in size and complexity of demand for private rented and purpose-built accommodation, the next five years will be characterised by changes in the way private rented homes are supplied.
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