In our latest blog, our very own Guy Butler answers some of the burning questions on the PRS sector
What drives the PRS market outside of London?
“There are a number of elements, which dictate the market.”
Out turn of graduates
“Cities with large student numbers that manage to retain their graduates require accommodation better than student digs and therefore PRS satisfies this market.”
Culture
“Places with a high level of culture provide a good environment for PRS. Empty nesters and retirees move back into the core to enjoy life.”
Employment
“Locations that have a transient employment, with a churn of skillsets not borne in the city can see a demand led by a specific employer. So the financial or science sectors might drive this.”
Lack of owner occupation opportunities
“If there is no stock for sale and the only opportunities are to rent, then people will fill this space as the next best thing.”
Pricing
“Expensive city centre locations drive people to rent. Where the stock is cheaper, then the point of entry is easier for owner occupiers.
“So supply and demand is driven by different factors.”
How will the PRS product (which is still in its infancy, I know) look different outside of London to the PRS that’s being pioneered INSIDE London? Will the type of sites, size, spec be very different – and if so, how?
“The elasticity of demand and the propensity to pay greater rents for optional extras in schemes (like tennis courts, swimming pools, spa, bar, communal dining room, cinema) will not be evident as much in the regions as compared to London. The premium over the core basic rent, in say Manchester, is limited if evident at all. There are perhaps, at any one time, 100 units that can sustain this premium and has the demand, whereas in London there might be 5,000 units.
“So the offer of product, and therefore the premiums that can be achieved, is much greater in London. This will mean that core offer of PRS in the regions will include a gym, storage space, concierge and quality reception areas, but the service will probably end there. In London there is a premium service, which is sustainable at different levels, up to a hotel ‘ full service’ offer in places.”
Which parts of non-London UK are hot, and which not? And why?
“All Tier 1 cities (Manchester, Birmingham and Leeds) are hot and some Tier 2, such as Bristol, Oxford and Cambridge are also ripe for PRS. This is predominantly because of a combination of strong further education numbers, higher employment, growing inward investment, culture buzz and general growth. In short, it’s an area where people want to live. Scotland still has some concerns because of rent controls – so whilst Edinburgh and Glasgow have the fundamentals right, they are less attractive.
“Then there are specific places which are of interest because the supply of new homes has been low and the rented stock is full (e.g. Liverpool), where the price of entry into the market makes sense with low land prices (e.g. Newcastle) or there is a structural change in the demand due to infrastructure (e.g. Reading with Crossrail).
“Those that fail to be attractive from a PRS point of view are those peripheral Tier 2 cities without a story where the demand is not perceived to be present, or where the supply from the last cycle has been mopped up with rentals, so demand is limited.”
For a large-scale investor, individual or institution, what are the likely returns?
“This is a changing number. Two years ago funds would offset value with the perceived risk. Land and property were cheaper and this could be accommodated, but as prices for land and property have grown, yields have tightened. So from above 7% we now see opportunities being funded at less than 6%. This will bring less suitable sites to the market and make them viable. This is not necessarily a good thing. However, gross to net deductions for voids and management are changing and therefore some value can be achieved from this as the market matures.”
Why should an investor get into this sector rather than other sectors (general residential, for example)?
“The market is immature – management costs will come down and enhance returns. Whilst occupiers will settle to the concept and stay for longer, the market will mature and returns will grow.
“At the moment the risk with the market is over stated and therefore getting in early will benefit those with the foresight. What it provides are large lot sizes, with a spread of lease risks but this is offset with a specialist knowledge and skillset required to get the returns. Only those entering the market now will build up these skills thereby creating a competitive advantage.”
What are the downsides of investing in this sector, now and in the future?
“The biggest threat to the sector comes from Central Government, which can change taxation at the drop of a hat. In the last budget, the removal of interest offset for small time buy to let investors, completely changed the attractiveness of buy to let investment. Any micro change in rent caps or the like for consumers will have a big impact the performance of the assets. Following the election this has gone away and confidence has increased.”
“Local Government policies are also an issue. A stealth tax has been introduced in Liverpool with all residential leasing requiring licences – at £500 per unit. This has an impact on the return and therefore the attraction to investors.
“Skills – you need to know what you are doing. It is a very hands on business and getting one element wrong in a multi tenanted building, can result in the mistake being repeated many times over.”
“Scale – the greater the scheme, the better the return as critical mass can support additional services in the building – for example a concierge can be supported in the regions by 250 units or more.”
We’ve seen the rental sector generally be faced with a series of bureaucratic demands from local landlord licensing to extensive health and safety requirements – is this too much for investors?
“Issues such as licensing, rent caps, health and safety are often implemented by people that do not understand the sector but believe that quick, financial, wins will please their leader or councillors. Some of these draconian measures can fundamentally change the viability of a scheme, after the scheme has proceeded. On ‘The Keel’ the £120k licensing bill was not in the original appraisal, and the funding reflects market growth of rents – should caps be places on rents, then this will direct investment away from cities where these local changes are made.”
If you’re interested in finding out more about PRS then give us a call on 0161 832 7601.