Residential Land has recently been featured in Property Week within the Perspectives section. Bruce Ritchie explains what PRS should stand for and the challenges that the private rental sector has to face.
The article in Property Week is detailed below otherwise you can click here to go to Property Week website.
Property Week article: What should PRS stand for?
The growing market needs international investment – and new skills
The private rented sector (PRS) in the UK is growing. There are now several large new-build schemes with specific rental planning consent under construction, particularly in London where we are based, and more to follow.
However, for the sector to continue to grow, we need to promote the services we offer and to set the scene properly, and in some ways the property industry is not ready for it.
Before tackling what’s holding back the PRS, we need to first ask: what does PRS really stand for? To me, it stands for ‘professional rented sector’. PRS to us is the institutional, corporate end of the rental market as opposed to the letting of single flats and houses by individuals more commonly called buy-to-let landlords. By creating the term PRS, we have lumped together, in the public’s eye, all residential rentals.
The build-to-rent market is aiming to differentiate itself from private landlords who are more likely to be tarred with the tabloid image of poor-quality accommodation, bad service and hidden charges. This image is what the professional rented sector needs to separate itself from.
The reason such a sector is emerging now is due to the phenomenal growth in the UK’s rental market. Since 1988, the number of people renting in the UK has grown from 7% to 35%, which is an enormous section of the market. The growth in the number of buy-to-let purchases adds to many homeowners who now rent out a spare room to be able to assist in affording their mortgage payments. New legislation has made this easier, by giving individuals the ability to rent out their home for a holiday let for up to 90 days in any 12-month period, for instance.
For the first time, we have a substantial proportion of the population who, in general, know more about renting than they do about buying a property – either as tenants or as novice landlords. Tenants are increasingly aware of their rights of tenancy agreements, of notice periods, of rent reviews and of the kind of reasonable service or behaviour a landlord should provide. They are interested in how their lives improve within the rented sector. This is where the professional rented sector has its part to play.
With the backdrop of a strong and growing market, for the PRS to prosper, those in the sector need to focus on standards. Any professional landlord will know that, if you offer a better service and better product you will get a better price and a better return on investment, as well as have an easier life because you’ve done what you should have done.
The rental sector so far has been good at implementing self-regulation. Professional landlords, by and large, have accepted rental agreements that are clear and concise about both a tenant’s and landlord’s rights. They sign up to the Housing Ombudsman, even though they don’t need to.
Self-regulation is a sound way to do it, better than implementing more quangos, red tape and bureaucracy. We have a market with professional agents and professional surveyors who would scream and shout if standards were not upheld by their client. We all have a responsibility to ensure that high standards permeate within the PRS.
Take what is happening in the US, with the proliferation of what they call multi-lets or family lets: large-scale properties with thousands of occupants. Those properties are usually well managed, we’ll let and we’ll publicised; landlords have to compete with each other. It’s an open marketplace.
Standards are a crucial part of building a successful PRS business. Our tenants are our customers. We are selling them the opportunity to rent one of our products and, if we don’t treat them correctly, we only have ourselves to blame.
Choice is the most important thing to a tenant – of location, of rental level, of co-tenant and of tenancy length – which is why the concept of making threeyear tenancies the norm is ill-advised. What of the landlord who has a building that needs refurbishment in two years’ time or needs refitting completely to meet regulatory standards? Do they start emptying their building three years before because they have to restrict themselves to a three-year tenancy? What of the tenant who has a one-year job position and does not want to be lumbered with a three-year commitment?
A policy from Labour in the recent general election was to establish a national register for landlords. This is a half-way step towards a national reporting system on the quality of landlords. If it is used for good, taken to the point where people are allowed to comment on what their service has been like – perhaps modelled on TripAdvisor, for example – this could generate a better situation for all involved. Although Labour is not in power, this could be an idea for the government to adopt.
If the recent election result has taught us anything it is that Britain is a nation in the majority of people who aspire to succeed and do better. Those people want flexibility to move to a better home or a different location; they do not need to have their hands tied. Most landlords are happy to offer longer tenancies. The free market enables tenants to find them if they need.
I’m not so sure that the build-to-rent market, despite its growth, is going to be a huge stimulus to the property industry. And why is that? I identify three crucial reasons.
First, most developers build to sell, because that’s what makes money. If the profit is going to be larger by exporting these units to China than finding a buyer who can hold and rent it for 15 years, that’s what the builders will do. It is difficult to buy blocks of flats for rental from new housebuilders and this will only change if the export market dies off . If all new build had to be offered for sale in the UK first, we would see a larger proportion of this stock being occupied by British residents and investors.
Second are the planning constraints. Until such time that local authorities are all on board and it is the norm to give planning to a new-build block specifically on the grounds that it is rented to the PRS for a fixed period, say 10 years, where there is no affordable contribution other than this commitment, you’re not going to end up with a lot of buildings being created for this use. This leads to the third possible impediment to the growth of the PRS: if regulatory or fiscal changes are made that make the sector a less attractive investment for overseas investors, it could grind to a halt.
There are currently 115,000 homes being built in major schemes in London. More than 80,000 will be funded by overseas money, because the government doesn’t have any money to do it. UK developers are finding it very difficult to compete to acquire sites; even if they could navigate the planning red tape and requirements, they are not going to build enough homes to meet UK requirements. Development finance is expensive and not easily available, thus providing liquidity issues to the growth of the market.
We should be prioritising that overseas investment is protected. New homes aside, the UK benefits hugely from regeneration, from the construction costs, sourcing the materials that were used and deploying the skills involved. Even if UK properties are rented or sold to overseas, they still bring huge advantages to the UK. In a factory, if you manufacture a product to export, it’s out of the country and all you have to show for it is the money. In the property industry, we manufacture an asset, we sell it abroad and it stays here, earning us money for the rest of time. It provides a continuing income for the country as well as homes for our population when those properties are rented by their foreign owners.
Ultimately, coming out of recession, what’s driven London is not the government saying we want lots of builders. It’s been foreign income investing in schemes because there’s strong market growth in terms of capital values and income. If this isn’t nurtured then we will not hit our targets either through the PRS, London development or the UK in general for new homes.
Learn new skills
A final barrier to growth of the PRS is the fact that the commercial property industry, which is keen to get involved, lacks the required skill set.
Imagine the number of customers in a large residential block, perhaps 1,000 tenants to look after; that’s an enormous business. If you are a retail, office or shed landlord you’re never going to have that diversity of customer base. Plus, you collect money once a quarter, whereas we collect every week. It is normally our responsibility to repair a property and to insure it, not the tenant’s. It’s a lot harder to be a large-scale residential landlord than a large-scale commercial landlord.
The skills you need within your company are vast, from building surveyors to electrical engineers, from health and safety people almost to psychiatrists who can help a tenant with their habitation issues. It’s personal – people in their homes and occupations having daily issues that you have to handle from a professional point of view. That’s put off a lot of people from getting involved.
While we don’t have the land to replicate the market that has been created in the US, given the thousands of successful landlords there I have no doubt that the market will continue to grow in the UK. Returns are being made, our cities are being regenerated and at the moment foreign investment continues to arrive. We just need to get a few things right.