Popularity of PRS soars but some still see it as too risky

Investment in the UK private rental sector (PRS) is set to increase by £45bn over the next five years, reveals new research - but some of the UK’s largest investors still perceive it as too risky.

Knight Frank’s Multihousing 2017 report, published earlier this week, showed that total investment in the sector had risen from £15bn at the beginning of 2016 to £25bn in 2017.

It predicted that in the next five years this would almost treble to £70bn, sharply up on the forecast made in the same report last year, when investment was expected to reach £50bn by 2021.

However, during a Movers & Shakers panel discussion last week, some of the UK’s largest investors argued that the barriers to entry into build-to-rent (BTR) were still too high.

“We don’t do anything we can’t go into without scale; I’m talking £1bn, £2bn, £3bn-worth,” said Rob Noel, the chief executive of Landsec. “The reason we don’t do [BTR] is because the returns we get from it are not enough for the risk we are taking.”

Until we get cross-party political support, it’s a no-go zone for us - Rob Noel, Landsec

Noel said that although Landsec had “billions ready to go for [BTR]” it would not deploy the funding until the government and opposition parties gave their full backing to rented housing.

“Until we get cross-party political support for build-to-rent with planning assurances, it’s a no-go zone for us,” he said. “It’s an unstable environment.”

Anne Breen, the head of real estate research and global funds at Standard Life Investments, agreed. “It looks like development risk and that doesn’t sit comfortably with our investors, who want stable returns,” she said.

Planning the biggest hurdle

The Knight Frank report said that the investors it surveyed had identified planning policy as “one of the biggest hurdles”, with 54% citing it as a problem. The second most commonly cited problem was land supply, which 38% said was an issue.

Both of these were identified as barriers to investment in February’s housing white paper and are now the subject of government consultations. Meanwhile, only 23% said that raising capital for PRS was a potential hurdle.

The Knight Frank report noted that only 12% of UK private renters currently lived in accommodation run by large-scale corporate landlords, creating an opportunity to better serve those who rented from private landlords.

Bill Hughes, head of real assets at Legal & General Investment Management, one of the largest investors in the UK PRS, said that the market was still small and that investors would need to focus on funding new developments in order to create a pipeline for the future.

Because high-quality [PRS] does not exist in the UK, the only way to address it is to build now what we want to own in the long term - Bill Hughes, Legal & General Investment Management

“Because high-quality [PRS] does not exist in the UK, I’m afraid to say the only way to address it is to build now what we want to own in the long term,” he said. “The reason we have gone into BTR is we want this in our portfolio for the next 30 years-plus. We can’t buy at the levels we want in the current market.”

The Knight Frank research also found that PRS investment was currently weighted towards the capital, with 65% of investment in London compared with 35% in the regions.

It forecasts that net yields in the capital would settle at 3.5% by 2021, compared with 4.4% in the regions. Among the major regional cities, it predicted that Bristol would see the hardest yields at around 4.1%, while Glasgow would see the softest at 4.8%.

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