By John German
Three key facts about the UK Private Rented Sector (PRS) in England (1) are:-
1. As of December 2014 there were an estimated 22.6 million households. 19% (4.4 million) of these are in the PRS, which grew by 76% over the previous 10 years.
2. 48% of all households aged 25-34 are in the PRS.
3. 48% of all PRS housing stock was built pre 1945 and only 18% has been built in the last 25 years.
This suggests that there is a large market which is drawing large numbers from those leaving the university system who also cannot afford to buy, with stock that is dated and may not be fit for purpose. At present the bulk of this stock is in the hands of private landlords (Buy to Let) and only recently have institutional investors started to turn their attention to PRS in the UK (2).
In considering an asset class, the size of the potential market is a key consideration. The value of the UK PRS is about £1.1trn (3) and therefore offers scope for large scale institutional investment.
Invesco has 25 years of experience, which is drawn from the United States residential rental market. 25 years ago the US market looked very much like the UK today, with limited institutional investment. US residential is now a mainstream asset class and Invesco believes that the same could apply in the UK.
The UK residential market currently suffers from an under supply of new housing. This lack of supply, coupled with the projected growth in population which is one of the highest in Europe (4) provides an opportunity for institutional investors to enter the market and create purpose built stock that is designed for rent and may help satisfy some of the growing demand.
Those institutions who have invested in PRS have seen returns that have outperformed other real estate sectors (5); and PRS has also shown a low correlation with other real estate sectors, so providing diversification for the investor (6).
Finally the UK government sees the PRS as a key market and has offered support to try and encourage institutions to invest in the sector. Lord Ahmad of Wimbledon (Parliamentary Under Secretary of State for Communities and Local Government) on 13 March 2015 stated: “This government has actively encouraged more institutional investment into the provision of new build rented homes.”
All these points suggest that PRS is an asset class that warrants consideration.
The major challenge that an investor faces is that PRS is seen as a specialist sector that is difficult to access. The market has seen the creation of strategies by investment managers with specialist teams that should allow an investor to develop new “purpose built” rental buildings which will aim to deliver income returns that match investors’ liabilities. At present investors can also take advantage of the limited competition that exists in the sector and with an asset class that is expected to grow, they should have a variety of exit options in the future.
John German is director of residential investments at Invesco Real Estate
References
- English Housing Survey – Headline Report (February 2015) Department of Communities and Local Government
- Invesco Real Estate, July 2015
- Department for Communities and Local Government (DCLG), December 2014
- Oxford Economics, Q4 2013
- Investment Property Database (IPD), December 2014. Based on total return over a 30 year period vs. IPD All Property, Equities (FTSE All share) and Gilts
- Invesco Real Estate, IPD and Datastream, based on total return 34 years to December 2014 vs. IPD Retail, Office, Industrial, All Property, Equities (FTSE All share) and Gilts
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