The private rented sector now accounts for 20% of all households, having grown from 2.8 million households in 2007 to 4.5 million household in 2017 – an increase of 63%.
Younger people are more likely to rent privately than older households, according to the ONS, and those in the 25 to 34 years age bracket represent the largest group (35%) of private renters.
However, households in the private rented sector are getting older; between 2007 and 2017, the proportion of people aged 45 to 54 in private rented accommodation increased from 11% to 16% while those aged 16 to 24 dropped from 17% to 12%.
Put simply, the private rented sector is a vital component of this country’s housing stock and the statistics indicate that it is becoming more embedded as an option for people throughout their lives, not just as a stepping-stone for the young.
This trend shows no signs of abating. The impact of the Covid pandemic has increased job uncertainty and wiped out the savings of many potential homebuyers. At the same time, mainstream mortgage lenders have tightened their risk appetite and the supply of high LTV mortgages has been limited, driving up the cost of borrowing. Even amidst the uncertainty of the current environment, it is safe to assume that more people will continue to rent for longer, creating an even stronger rental market.
So, it is perhaps unsurprising that despite the onslaught of taxation and regulatory changes property investors have had to endure in recent years, as well as the difficulties of collecting rent during the pandemic, the number of UK landlords has hit a record high of 2.7m. This is according to London based estate agency, Ludlow Thompson, which says the number of buy to let landlords has increased by 49% compared to 2015, when there were 1.8m.
Where there is strong demand, smart investors will find a way to supply it and recently the build to rent sector has grown in popularity as a way of doing just this.
The rise of build to rent has not always been due to choice. Many developers have found that they have been unable to sell some stock in recent years and so have retained properties and refinanced onto three- to five-year mortgage in order to stabilise their assets.
There are many advantages to doing this. By refinancing onto a term loan, developers are able to lower their funding costs and by letting the properties they can earn an income on the asset while waiting for the most opportune to time to sell. They may even choose to hold onto the property for a number of years before disposing of the asset if it delivers a reliable income and the capital value shows growth.
What started as an accidental trend has become amplified by the pandemic. With so much uncertainty, developers are planning for multiple different exit strategies so that they are prepared for different circumstances, and many are now entering projects with build to rent considered as their primary exit strategy.
Although it is sensible for developers to maintain a flexible approach and keep their options open when it comes to an exit, identifying build to rent as the primary strategy often has a significant impact on the design of a scheme. For, example, if developers intend to let the properties from the outset they will be more inclined to opt for lower maintenance, harder wearing specifications.
Covid has also had an impact on the types of property that are in demand by both buyers and renters, according to Rightmove, which says that apartments have fallen out of favour with property hunters, who are seeking larger premises with outdoor space, often outside of large cities and towns – and this will also be a big consideration for investors.
There are likely to be other trends that come to the fore as build to rent continues to grow in popularity. For example, for many developers it makes more sense from a tax and management perspective, to build portfolios in a company structure rather than their own name.
Lettings are unlikely to be restricted to longer term tenants renting on an AST. More investors are choosing to operate their properties as short term lettings businesses, particularly in popular areas for staycations. The pandemic forced most holiday makers to remain in the UK in 2020, and in 2021 holiday lets in this country are likely to remain in high demand. There are many different considerations to running a holiday let compared to a buy to let, but they can deliver superior returns and are treated more favourably from a tax perspective, as a trading business rather than a rental property. Short term lets present another opportunity for build to rent, with developers choosing popular seaside destinations and including more luxurious specifications to capture the holiday let market.
And, as the sector matures, there will be a growing remortgage market for investors who have developed properties to let. Despite recent turbulence, rates remain historically low and developers can continue to maximise the return they earn from rental income, by making the most of those low rates and reducing their finance costs.
2021 still holds many unanswered questions, but it also presents many opportunities for investors. The key to making the most of those opportunities is securing professional, specialist and bespoke advice.
AUTHOR: Nicholas Christofi