Building Homes for Generation Rent: Can institutional investment meet the challenge?
There is an urgent need to increase the supply of housing in the UK to address the growing affordability problems faced by low to middle income families. We need to increase the supply of all types of housing in view of the scale of the challenge. But given that large numbers of low to middle income families are shut out of home ownership for the medium to long term and do not qualify for social housing, addressing supply must include a focus on market rent homes. Market rent is no substitute for an adequate supply of social and affordable housing, but it could play a greater and more positive role in addressing the UK’s acute housing needs.
In doing so, we must also offer a better deal to ‘generation rent’ based on purpose-built properties, more professional management, more affordable and transparent rents and greater security of tenure. The UK’s private rented sector remains characterised by individual landlords, older properties, short term tenancies and variable quality. Changing the offer is particularly important for families with children, who now make up a third of the 3.8 million households living in the private rented sector. A purpose-built rented sector managed by professional landlords and financed by institutional investors such as pension funds and life companies offers the potential to deliver a greater supply of market rent properties alongside a better deal for tenants. Institutional investment underpins the build to rent sector in the US and in several other European countries but despite a number of attempts in the last decade to secure investor backing to kick start the sector in the UK, it has so far failed to take off.
A central question underpinning its slow development is the extent to which a better deal for tenants is compatible with investor expectations. And, if build to rent represents a viable proposition for investors, can it meet the affordability needs of low, modest and middle income families in different parts of the country or is it only a solution for higher income tenants in London?
The analysis presented in this report attempts to take the debate over build to rent to the next stage by using real data from actual or planned developments and examining where and how build to rent might work, what the improvements for tenants could be, what the returns for investors might look like and where the key challenges lie.
This analysis demonstrates that build to rent can deliver an affordable, more secure rental product for modest and middle income tenants in different parts of the country at the same time as delivering a competitive return for institutional investors at relatively low risk. From an investor perspective, the return from build to rent set out here offers a degree of inflation hedging, with rents expected to rise in line with CPI over the long run, and the build to rent asset class also offers significant opportunities for diversification within an overall investment portfolio. Despite these clear opportunities, build to rent has been slow to take off because, while it does not require public subsidy or significant policy change, it does depend on effective partnerships between housing providers and investors to address historic concerns around scale and the risks associated with residential investment, as well as careful site selection and the efficient delivery of schemes. To date, these necessary ingredients have rarely come together.