UK private rental housing sector to rise to over 5.8m households by 2020

One of the most significant changes taking place in the UK residential market is the sustained growth in the private rented sector (PRS), which has been growing substantially over the last decade or so. The sector has nearly doubled since 2002, with private renting now estimated to account for around 20% of all households – and, in 2015 alone, numbers are thought to have grown by 11%. This growth looks set to continue in the medium term with the number of households in PRS expected to rise to over 5.8m by 2020.

One of the major drivers of PRS growth has been the lack of housing availability and supply, particularly for first-time buyers, which has been exacerbated by rising house prices in London, the South-east and other major cities. The bulk of this rental demand has been driven by the 25–34 age-group, the so-called ‘Generation Rent’, with renters in this age group more than doubling since 2003. Population growth, net migration and a mobile younger workforce have all contributed to increased demand for homes in the PRS.

Since 2012-13, private rental has been the second largest housing tenure in England behind owner occupation, and overtaking social housing, while home-ownership levels have fallen. In London, privately rented households account for as much as a third of homes.

While PRS is dominated by smaller private landlords owning around 75% of properties, many institutional and large corporate investors are showing increasing interest – already owning around £20billion of PRS properties. The remaining PRS stock is held by other organisations including housing associations, local authorities, charities and student housing operators.

The PRS is now becoming an important asset class in its own right and is set to show comparable growth to that seen in other ‘alternative’ property sectors such as budget hotels and student accommodation. However, PRS in the UK is still in a relative stage of early development compared to the US market, for example.

Institutional investors represent a new source of finance for the housing market, separate and additional to traditional house-builders. Some of the early developers in the ‘Build-to-Rent’ market, such as Essential Living, Fizzy Living and Grainger have been joined by a number of UK investors, mainly financial institutions, who are also now committed in excess of £10bn to the sector – including companies such as Legal & General, APG, M&G Real Estate, Hermes and Invesco.

In the private sector there are developers with established PRS portfolios, such as Touchstone, Grainger and US firm Greystar, which moved into the UK market in 2015. Greystar is building one of the market’s biggest developments to date at West Greenford in Middlesex, where PRS accounts for around 1,000 of the site’s 3,000 homes.

The planning system continues to present challenges to the viability and delivery of many PRS schemes. The process remains complex and the potential delays in being granted permission is often cited by residential developers as an issue hampering development. In addition, the limited availability of suitable sites for PRS developments has been identified as one of the major constraints to the development of a volume of stock sufficient to attract institutional investment in the PRS.

The DCLG has forecast that, due to population growth and growing demand, the UK will need more than 1m extra rental homes to meet demand over the next 5 years, a view which is endorsed by industry forecasts. The Government is leading a number of initiatives to support PRS, particularly in London where an annual 5,000 target for new rental homes has been announced, and the use of public land to support ‘Build-to-Rent’ development has been encouraged. The Private Rented Sector Taskforce was established in April 2013, which included a £1bn ‘Build-to-Rent’ fund to help kick start PRS development and to build 10,000 homes specifically for private rent.

“Over the next few years, development in the PRS is expected to see a shift towards more purpose-built housing, predominantly high rise, with increasing financial backing from institutional investors.” Said Andrew Hartley. “There is increasing scope for the Build-to-Rent/PRS to provide significant opportunities for investors, developers, house-builders and contractors.”

Large scale PRS or build-to-rent schemes can also offer opportunities for modular and offsite construction, and this could drive the growth of a larger scale off site manufacturing capability for housing in the UK. The PRS also has implications in terms of maintenance and refurbishment and opportunities for companies in the FM supply chain, as PRS and build-to-rent schemes require maintenance and upgrades at regular intervals. Going forward, with significant demand for residential portfolios in both London and across the UK, and rental demand currently outweighing supply in the market, the future is likely to see more new homes built through the PRS via Build-to-Rent or institutional investment.

The ‘Private Residential Rental Market Report – UK 2016-2020 Analysis’ report is published by AMA Research, a leading provider of market research and consultancy services with over 25 years’ experience within the construction and home improvement markets. The report is available now and can be ordered online at www.amaresearch.co.uk or by calling 01242 235724.