Rental sector takes centre stage

Rental sector takes centre stage

Paul Stockwell, Chief Commercial Officer

As sluggish housebuilding sees house prices soar, it is up to the rental sector to provide homes for those who are unable – or do not want – to buy

Decades of sluggish housebuilding have created house price growth and affordability constraints, increasing the need for the rental sector to provide homes for people who cannot afford to buy, and for those who do not want to buy.

At the same time, the sector is evolving, and landlords are adjusting to new models and challenges to meet demand from tenants.

Gatehouse Bank provides finance for the accidental landlord, who rents out one property, and the professional landlord, who has a portfolio of properties, as well as the burgeoning build-to-rent sector, led by institutional investors.

Landlord challenges

Times have been challenging for many accidental and professional landlords, who have been hit by tax and stamp duty changes. Yet they remain resilient, with their focus largely on long-term capital growth and rental yield.

They still have a vital role to play in the rental market, particularly since 95 per cent of the entire private rental sector is supplied by accidental and professional landlords. Currently, one in five homes are privately rented, and this is predicted to grow to one in four by 2025.

At the root of the rental sector’s evolution is the growing participation of 25- to 44-year-olds in the market. There has been a 54 per cent rise in 25- to 34-year-olds and a 115 per cent per cent rise in 35- to 44-year-olds privately renting between 2007-08 and 2017-18.

Business is booming in the institutional build-to-rent sector, where 148,046 properties have already been delivered, are under construction or are in planning, as of October 2019. This is a 20 per cent jump compared to the same period in 2018.

In the UK, the majority of build-to-rent investment has focused on multi-family apartment towers, usually in high-density areas. These often provide tenants with additional benefits, including dry gyms, cinema rooms and concierge facilities.

The build-to-rent asset class found in the US has the same multi-family housing apartment model as the UK, but it also has a single-family housing model, where houses are built specifically to be rented out.

The long-term sustainability of stand-alone single-family homes in the build-to-rent market makes it an ideal venture for us. We manage two build-to-rent funds of single-family homes. These portfolios are situated in suburban areas – offering more of a community village feel – where this type of family accommodation is in high demand.

This model can provide institutional investors with a long-dated, resilient and inflation-indexed stable income stream underpinned by favourable supply-and-demand dynamics and a defensive asset class in UK residential property.

In our view, single-family build-to-rent homes are the next big growth area in the UK build-to-rent sector. It will help to increase the supply of houses at a time when building remains stagnant, but also meet the demands from another group of renters: families who want a more permanent residence.

Apartment blocks are operationally intensive, and therefore expensive, with high overheads stemming from staffing costs such as concierge facilities and amenities such as dry gyms and cinema rooms.

The single-family housing model provides top-quality, brand-new housing consisting of the best-in-class specification and a professionally managed service, but without the increasing levels of amenities that are seen in the multi-family space. As a result, it is more efficient.

Ultimately, decades of under-supply in new-build housing means rented properties are in high demand. But since tenants have so many different needs, private landlords, both amateur and professional, and institutional landlords all have a vital role to play in the market, operating comfortably alongside each other.

This blog was featured on Mortgage Strategy.