Investors with a well targeted product for a burgeoning rental market can cash in

Debbie Aplin new

If we look at some of the barometers of a healthy housing market, it seems things are finally moving in the right direction.

Thanks to the government’s Funding for Lending scheme, mortgage credit restrictions are easing. Meanwhile, the affordable homes initiative has boosted public expenditure with the launch of a £3.3bn fund to build 165,000 homes over the next three years. Positive sentiment resulting from improving economic indicators, including positive growth and Help to Buy, is undeniably helping to address housing supply shortages.

But, while this is encouraging, we mustn’t forget that we aren’t out of the woods yet. The International Monetary Fund has called for more growth-enhancing government initiatives and further quantitative easing is on the Monetary Policy Committee’s agenda. But what will a more active housing market mean for the squeezed middle?

Suddenly we have a big opportunity for institutional investors to wade into the market. So what have they been waiting for?

Unfortunately, we can’t escape the fact that low-to-middle income households will still be unable to buy, increasing pressure on the private rented sector.

Suddenly we have a big opportunity for institutional investors to wade into the market. So what have they been waiting for?

Last month Savills’ Market in Minutes: Market Rent Opportunities research reported that an estimated one in five households in England - an astounding 5.7 million - will be renting in the private sector by 2018. People are also renting for longer. In many parts of England and Wales renters are typically aged between 20 and 35 years. As the proportion of renters rises, investors with a carefully targeted product can enjoy strong yields, along with the prospect of longer-term capital appreciation.

Despite this, take-up from the institutional sector is painfully slow. Much of this could be down to lack of experience, as well as fears around management costs and stock quality. Certainly the government could do more to encourage the sector - for example, by allowing developers to waive affordable housing in certain cases.

We are seeing some positive changes though, including an increase in the Homes & Communities Agency’s Build to Rent Fund, which is rising from £200m to £1bn and will deliver up to 10,000 rental homes in the first phase. The question is whether the industry is in a position to respond in terms of product and whether, now the market is more buoyant, developers will take the risk if there is no “end user”.

The government has also announced plans to sell an extra £5bn of land between 2015 and 2020 to create the supply necessary for more homes. Will they insist that part of these future sites be set aside for purely open market rental homes? If so, we could see even more opportunities to deliver communities with the right balance of market, affordable and rented tenures.

We’ve also seen the creation of a Private Rented Sector Taskforce working closely with potential investors from across the housing community to refine proposals for future viable investment, thereby assisting projects that would not otherwise be progressed. Much of this should be applauded, and affordable housing providers are leading the way. Recent announcements have included the creation of a private rented sector portfolio, thanks to combining housebuilder stock with additions to their own portfolio.

Security of tenure is likely to be one of the biggest mind-set changes required before people can even begin to view renting as an acceptable alternative to ownership

However, the market rented sector is not the only answer for helping people into home ownership. While some may argue that the increased interest in the private rented sector is a direct result of a failing residential market, the rental sector isn’t only an option for those who can’t afford to buy. For many it forms a welcome and natural stepping stone while saving for a deposit, and some may choose to rent to allow for job mobility without the upheaval of relocating with baggage.

Then there is the concept of a new rental product, whereby tenants pay a premium on top of the open market rent in return for additional services such as cleaning, deliveries and shopping. This may be suitable for busy affluent professionals but will also require a more fundamental shift in the national psyche, which considers home ownership the ultimate goal.

The rental market clearly has its place, but security of tenure is likely to be one of the biggest mind-set changes required before people can even begin to view renting as an acceptable alternative to ownership. Improved management by increasingly experienced investors will do much towards improving living environments and help to improve perceptions of long-term renting.

The real question now is whether the industry can provide the additional choice of product and adapt to a potentially changing tenant market. Only then will institutions have the confidence to commit.

Debbie Aplin is managing director of Crest Nicholson Regeneration

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