Construction inflation, Help to Buy and customer sentiment all restrict growth of new build rented homes

Steve Douglas

A few years ago the private rented sector (PRS) was being heralded as the genesis of a new era of large scale new build activity. A number of private developers and a host of housing associations identified PRS as both a great opportunity to diversify their activities, and to make a decent return on their investment.

It was no surprise then that a report by estate agents Knight Frank in February 2014 reported that the private rented sector has more than doubled in the last 14 years and is set to expand still further, with over a sixth of the UK population, more than 10 million people (4 million households) now privately renting.

However, with increases in land and construction costs, and low inflation, suddenly PRS doesn’t seem quite the money spinner that many thought it would be. Combine that with the introduction of Help to Buy and continued low interest rates and large scale PRS actually suddenly seems a bit of a risk.

The issue for homebuyers has been one of accessibility to a deposit or to a high loan to value mortgage, rather than one of affordability

We’ve been working with a few organisations on their PRS offer and my view is that depending on how well you know your market and how well you know your product, PRS can be part of the suite, but it shouldn’t be the prime focus of your activity.

I don’t subscribe to the view that Help to Buy has cut the legs away from PRS, but it is a direct competitor. The argument goes that if I’m paying almost a third of my income per month in rent, when I could be paying the same for a mortgage, which would I be inclined to choose? It’s an easy answer.

The issue for homebuyers has been one of accessibility to a deposit or to a high loan to value mortgage, rather than one of affordability. Renting is hardly the cheap option. Both homeownership and private renting are equally unaffordable.

So if Help to Buy is a competitor then the offer on PRS has to be tailored to those who want flexibility, don’t want responsibility, don’t need stability and may be at a particular stage in their lives. This could be those starting out, but it could equally be recently separated, divorced or temporarily downsizing. All of this speaks of PRS as a short to medium term offer rather than a long term solution.

There are some organisations that have already made this revision to their propositions and now make PRS one part of their portfolio rather than the main thrust of it. Good luck to the others. You might yet make decent returns. Let’s hope you don’t make indecent losses.

Steve Douglas is a partner at Altair