For a variety of reasons more people rent their homes than 10 years ago in the UK. Developers and homebuilders are developing properties accordingly.
When Communities Secretary Eric Pickles announced in June 2014 that the Government was designating £49 million to support rental home construction, it was acknowledging a long-term trend in the UK. That is, for various reasons, a larger chunk of the working population now rents rather than owns its home.
The Government fund supports schemes under the Build to Rent programme, itself a £3.5 billion scheme targeting the construction of 10,000 new homes for private rent. It specifically helps developers to build larger scale homes for the private rental sector. Of note, these are intended to be quality homes that will help goad private investment in this sector, such as through property fund partners. The program is already oversubscribed by developers and likely to reach its 10,000 home goal.
But who are the renters – and will there be enough demand in the future?
The traditional view of renters in the private market was that they were young working people, saving up a deposit such that they could purchase a home in the next few years. But the housing crunch and stringent lending practices since the financial crisis in 2008 have changed that considerably. Some statistics worth considering:
• The size of the private rental market has risen by 89 per cent between 2003 and 2013.
• In England and Wales, the rise was from 1.9 million households to 3.6 million.
• “Rental hotspots” – areas where between 20 and 40 per cent of homes are rented – numbered only eight in 2001 but now 51 areas have that high a concentration of renters.
• Traditionally, large cities with high housing costs such as London and university towns had the highest concentration of renters. But now higher concentrations are seen in Torquay, Torbay, Eastbourne, Hastings, Bournemouth, Shepway and Newmarket – each with more than 20 per cent renters.
There are a number of ways in which investors can tap into this market. One is through a real estate investment trust (REIT), which is akin to buying a stock in a company that builds or holds rental properties. Many REITs are in the commercial property sector, but increasingly the portfolios are exclusively or at least inclusive of residential property. Another is through an investors club, where a small group of individuals pool funds to buy a single home or flat; the price of entry can be as little as £1,000, attracting younger investors who like the proximity to the investment but cannot afford a full down payment on their own. Traditionally, individuals with adequate resources would purchase a flat on their own, manage it and collect rents over time, selling perhaps at the time they become pensioners.
Another option is in the strategic land investment realm. This may not involve holding the property when it is built and then leased. Instead, property fund managers will identify a city where the local economy demands more employees and new residences need to be provided. The investors may join in for £10,000 or more, financing the purchase of un-built land, with the hope of achieving planning commission approval to build on the land. With that, the fund may invest in infrastructure (roads, utilities) and then sell to a homebuilder. At this point, the properties are built and either sold or rented to occupants.
Regardless of the path the investor takes, he or she should always consult with an independent financial advisor regarding a real estate investment. The relative risks should be considered relative to the individual’s wealth building strategies.