Planning policy is one of the biggest hurdles for the multi-housing sector in the UK at present but that could change if the Government’s support for Build to Rent is carried forward.
Large scale investors are currently looking at longer term horizons with two thirds expecting to hold their assets for a decade or more, according to new research from real estate firm Knight Frank.
It identified that the majority of larger investors are doing so in London with just 35% looking at regional locations and although this is unlikely to change in the next couple of years there is potential for the London bias to recede as the market becomes more established.
The investor survey report confirmed the findings of the Government’s Housing White Paper earlier his year that planning is holding up development and that the National Planning Policy Framework (NPPF) needs to be changed to encourage more Build to Rent development.
It points out that land supply is seen as another key hurdle, echoing the concerns of the wider development sector. The Government has also highlighted this issue in the White Paper, and is consulting on moves to better identify developable land, especially that owned by Government departments.
Large scale investors are looking at longer term horizons when it comes to Build to Rent, with two thirds of respondents saying they will hold their assets for a decade or more. Those looking at a shorter time frame will have the choice of whether to break up the asset or sell it as an investment. ‘As the market becomes more established and more liquid, it is likely that the second option will be preferable,’ the report says.
The report also shows that across the UK, only 12% of private renters live in accommodation which is run by a large scale corporate landlord, ranging from large estates, property companies and private institutions.
When investors were asked where their investments were located in the UK, there were a diverse range of responses, with some investors focussing solely on London, and others more in the regions.
However, the average suggested that investment is weighted towards London with 65% of investment compared to 35% in the regions. However, increased market activity and demand in London, as well as other external factors, means that yields are currently lower than other urban centres around the UK.
Investors expect this to remain the case, forecasting that net yields in London will settle at 3.5% in 2021, compared to 4.4% in the regions. Indeed yields amount to 4.8% in Glasgow, 4.5% in Edinburgh, 4.4% in Leeds, 4.3% in Manchester and Birmingham and 4.1% in Bristol, all higher than London.
There have been several changes to policy in recent months which have underlined the Government’s support of the Build to Rent sector as a source of new homes across the country. In London the Mayor’s draft supplementary planning guidance (SPG) published in November last year indicated that large scale multi-housing operators should be allowed to manage all of their schemes, both private rent and affordable rent.
‘This will make a significant difference to the economies of scale for developers and operators, and enhance their ability to create communities within their schemes. It is expected that this move will be entrenched in the London Plan, due to be released in 2019,’ the report explains.
On a national level, the Housing White Paper suggested that the NPPF should be changed to encourage local authorities to plan proactively for Build to Rent where there is a need, and to make it easier for Build to Rent developers to offer affordable private rental homes instead of other types of affordable housing.
The consultation also looks at providers of new build rental accommodation offering longer tenancy lengths. Some of the biggest operators and investors in the sector have already pledged to offer three year tenancies.
Michael Wolfson, senior capital markets research analyst at Newmark Grubb Knight Frank, said the UK can learn from the United States which has a very well-established multi-housing sector with purpose built rented accommodation.
‘It is one of the biggest property sectors in the US. Across the country, tenant occupancy remains strong, highlighting underlying demand. The last 10 years has recorded an average occupancy rate of 94% rising to 95.3% towards the end of 2016. Yields have remained robust at 5.4% as pricing remains stable and the availability of good sales stock remains limited,’ he pointed out.
‘International investment continues to target the sector, and recently we have seen it steering towards secondary markets such as Atlanta, Charlotte and Phoenix. In fact, in the past 12 months, more than three quarters of international investment has been invested into the secondary and tertiary multi-housing market in the US with the remainder invested in more mature markets such as Manhattan, San Francisco and Los Angeles,’ he added.
