The housing shortage has become a key priority for the Government. This was cited in a housing white paper published earlier this year, and reinforced in the Conservative Party’s election manifesto. A pledge to build a minimum of one million homes in the UK across all tenures by 2020 has been made. This, coupled with consistently unmet demand and the comparative unaffordability of home ownership especially for the Millennial Generation, means there has never been a better time to invest in the Private Rental Sector (PRS) which is capable of strong and consistent yields.
The residential market has shown the best long-term performance of all of the UK’s main asset classes (13.8 per cent p.a. over the 42 years to 2012). In comparison, the equity market (FTSE All Share Index) recorded a total return of 12.3 per cent p.a. On a total return basis, it has also beaten commercial property over five, 10, 15, 20, 40 and 42 year periods.
The high cost of buying property, coupled with changing generational attitudes towards home ownership, has seen a substantial rise in demand for rented accommodation in the UK. Over the last five years there has been a 28.3 per cent uplift in the number of homes in the PRS, now totaling 5.7 million. That number, according to analysis published last year by PricewaterhouseCoopers, is expected to reach 7.2 million by 2025, one-quarter of all UK households, compared with 17.9 per cent in the last census.
This growth in demand is mostly being driven by the 25-34 age group, with one in every two now renting. It is anticipated that this unrelenting demand for PRS property will see further yield growth in 2017 and thereafter. In particular, higher yields are expected to be most keenly felt in regional cities, where rents grew on average by 4.9 per cent in 2015/16.
It is, therefore, an exciting time to invest in this sector in the UK. However, the key to a successful long-term buy-to-let investment is finding that perfect blend of strong rental yields for income returns and the potential for capital growth from rising house prices over time – and having the expertise to know when to capitalise on both.
Strong returns are also attracting major institutional investors. For example, Legal & General, the UK insurer, has teamed up with PGGM, the Dutch Pension Fund manager, to build 3,000 apartments across the UK in a £600 million build-to-rent plan. This partnership is projecting rental yields of three to four per cent. Other insurance companies and pension funds have been investing into this sector, with both the Prudential and Hermes Investment Management launching funds in the past two years.
New entrants, including increasing interest from US institutional investors such as Greystar Real Estate Partners and Blackrock, are actively encouraged by the initiatives set out in the Government’s white paper but only time will tell if these initiatives will be implemented successfully. However, new entrants are and will be constrained by the lack of supply of suitable PRS properties and the white paper recommends increasing the build-to-rent stock by local authorities, most of whom are also facing funding shortfalls, and housing associations, who are organised as charities and are unable to raise sufficient capital for new properties.
The only UK listed landlord is Grainger Plc [www.graingerplc.co.uk](http://www.graingerplc.co.uk), established in 1912 and now controlling one of the largest private rented portfolios in the UK, worth more than £2.7 billion. A major new force in the market is Essential Living [www.essentialliving.uk.com](http://www.essentialliving.uk.com), set up to be a developer and operator of private rental property in the UK and heavily backed by institutional finance and private equity, including DRC Capital. Essential Living is currently on site constructing more than 1,000 units in the south east of the UK.
The UK PRS continues to also draw in diverse new players. Rent Plus [www.rentplus-uk.com](http://www.rentplus-uk.com) has recently started offering rented and shared ownership accommodation at the lower end of the market.
A unique opportunity which is currently being launched, structured exclusively by SGS Development Capital, is focused on providing affordable market rent private homes for employed people, particularly young couples, in the age range 25 to 40+ (the ‘Millennial Generation’), with a preferential option to purchase in future. Indeed, as the market continues to expand, the traditional rented sector is starting to also attract demand from the over 65s and the SGS opportunity will also be available to them.
The SGS principals have experience, knowledgeable and practical insights into the rental yields and house price inflation (‘HPI’) trends across the UK and the PRS property portfolio will be put together to deliver maximum and consistent dividends to investors year-on-year as well as sharing in HPI gains when properties are sold on a preferential basis to tenants, on an open market basis.
