We live in an environment of increasing rental supply, higher costs, increased regulations and the onslaught of local licensing schemes, with many small landlords being effectively ‘taxed out’ thanks to Section 24. For a small landlord on a typical 70-75% loan-to-value, it is no longer a viable cash-flow model. In terms of the economics, we live in a two speed property market between London and the rest of the UK. In London and southern cities, much of the slow-down is being driven by stretched affordability. London traditionally led the way in terms of investor interest, but sentiment has turned against the city now that prices are struggling. The North West and other higher yielding locations are now more favourable due to better yields and capital appreciation potential.
Demand for rented accommodation is still high. Household growth, changing rental trends, and mortgage constraints should ensure strong long-term demand for rental homes. According to The British Property Federation: “Official projections suggest that the number of households in England will rise to at least 26m by 2026 – an increase of between 220,000 and 225,000 new households each year. Around 70% of these new households will be one- person households.” Longer life expectancy, migration and higher birth rates are projected to increase the UK population from 63m to 70m by 2021.
The Centre for Ageing Better predicts: “By 2024, there will be 18m people aged 60 and over — 3.1m more than in 2014. A baby girl born today has a 50% chance of living to 100.” The future rental market is growing and the next generation — 'Generation Rent’ — is no longer aspiring to property ownership as they struggle to buy with mortgage constraints, lower savings and later family formation. The culture of ‘home ownership at all costs’ no longer resonates with this new generation, who are less inclined to take on the heavy burden of high debt.
The future ‘Generation Rent’ expects higher standards, a better sense of community, and a higher quality of life, and they are less inclined to compromise on location, services and facilities. This new opportunity is attracting some large institutional players from the build-to-rent private rented sector (PRS), such as Granger PLC. These larger operators will drive up standards over the coming years. Operators such as Granger PLC plan to create clusters of build-to-rent homes that offer “mid-market rents and up to three-year family- friendly tenancies, coupled with added value such as free super-fast wi-fi and extensive amenity spaces.”
This industry is still in its infancy and plans to emulate the more corporate, professional rental markets found in Germany and North America. Buildings will be specifically designed for renters, with all mod-cons including 24-hour gyms, communal living rooms, co-working spaces and super-fast WiFi. The model usually involves full-time on-site management and a concierge team, meaning that residents do not have to put up with absentee landlords. Grainger PLC are the market leader. In their recent press release, they provided research from Savills UK and the BPF to show that by the end of Q3 2018, there were 131,855 build-to-rent units either completed or planned across 31 the UK, including 25,665 completed, 41,870 under construction, and a further 64,320 with planning permission. Grainger PLC Chief Executive, Helen Gordon, says: “We are building an entirely new product that finally offers renters a quality service from a reputable landlord at a price they can afford. Renters are responding accordingly to this new level of service and facilities, so post Section 24, smaller less professional landlords will be squeezed out against such professional competition.” We are moving closer to over-supply in many markets, and tenants now have much more pricing power. Landlords at the bottom and mid- range end of the market will find themselves under increasing pressure to improve standards to reduce churn rates and keep up with the general trend of higher expectations.
The HMO market is still lucrative, but the Government has controlled the growth via Article 4 Directions, and any existing owners in an Article 4 area will benefit from limited supply in terms of their selling prices. According to some of my industry contacts, the number of applications for newly available rooms has been steadily falling in many places. However, this rate depends on location, with some areas seeing less supply than others. Post-Section 24, in an environment where the Government no longer favours the rental market, it has become increasingly difficult for the small investor to make monthly profits after all costs, excluding a HMO model. With this in mind, a HMO model seems to be the best option, especially if you have well-located, larger en suite rooms. New-build apartments are often sold off-plan to overseas investors. These speculative builds are typically of very poor quality with small room sizes, offering a low standard of living. With one- and two-bed apartments largely over-supplied in many major cities, these buildings also offer an unattractive yield after costs. When inflation is taken into account, this sector gives a poor overall return in terms of capital appreciation.
However, for PRS corporate investors who have the purchasing power to buy very well located properties, this new generation of better apartment blocks provides a higher and more stable return in a low-interest-rate environment, where alternative investments such as Government bonds yield only 1-1.5%. The biggest revolution is happening in retail and commercial property, which is going through a major structural crisis. Rumour has it that some major shopping centre transactions are stalled and I estimate the bloodbath on the high street will be even worse than has been widely reported due to the ‘Amazon effect’. The downturn has not even begun to bite, despite major high-profile retailers such as BHS and Debenhams already getting into trouble. Fidelity, which manages a £617m UK property fund, predicted a 20-70% fall in value of UK retail property in an article published in the Financial Times in November 2018 (below). This is just the tip of the iceberg. Fidelity estimates that retail assets account for 41% of all UK non-listed real estate portfolios, spanning retail and institutional funds. Ryan Hughes, Head of Fund Selection at AJ Bell, says in the article: “We are very cautious on UK commercial property and particularly the retail sector.” https://www.ft.com/content/b600c8ca-ef04- 11e8-8180-9cf212677a57