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Residential buy-to-Let

The UK private rented sector: expanding and evolving

Author: Gemma

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The private rented sector (PRS) has assumed a more critical role in the UK property market than ever before, with demand for living space continuing to rise and affordability constraints preventing many would-be homeowners from getting on the property ladder.

Encouragingly for tenants and investors alike, the sector is expected to show ongoing, steady growth in the coming years. Some of the key trends were highlighted by Knight Frank in the Multihousing 2019 report, which noted that investors searching for long-term returns are “seeking out the opportunities afforded in the expanding private rented sector”.

Defining trends

The research findings pointed to a number of trends that will prove particularly interesting to investors who are considering opportunities in private rental property at the moment.

According to Knight Frank’s forecasts, the proportion of households in the PRS will increase to 22 per cent by 2023. Demand for privately rented homes is on the rise, with projections suggesting that 1.2 million new households will be created over the next five years.

Interestingly, young professionals (aged 25 to 34) no longer represent the largest tenant group in this sector. This demographic has been overtaken, marginally, by the 35- to 49-year-old age group, largely because of persistent difficulties in obtaining mortgage deposits.

Under-25s and over-65s are also expected to make up greater numbers of private rented tenants, with the latter group showing more demand for purpose-built senior housing.

From the investment side, total capital committed to professionally managed PRS accommodation is forecast to rise to £75 billion by 2025.

Tenant profiles

Knight Frank divided typical private rental tenants into nine distinct groups:

iGens: Early 20-somethings about to graduate or in their first job, living in urban locations
Nesters: Couples aged 25 to 49 living in urban locations
Soloists: Individuals aged 25 to 49, usually living in cities
Sharers: Groups of friends aged 25 to 49 sharing a home
Young families: Under 35, usually with dependent children
Mature families: Over 35, with dependent or non-dependent children
Active living soloists: People aged 50 to 64 living alone, renting long-term and usually in employment
Active living couples: Couples aged 50 to 64, usually in employment
Baby boomers: Retirees over the age of 65 living in the PRS

Nesters and mature families make up more than a third of all renters throughout the UK. When it comes to choosing a property and a place to live, all tenants cited affordability as their primary concern.

While most tenants said the lack of a mortgage deposit was their primary reason for renting, nearly a third (30 per cent) of iGens said they appreciated the flexibility of living in rented property.

More than one in ten people said renting made it possible for them to live in an area they couldn’t otherwise afford, while people over the age of 50 were more likely to be driven by not wanting the responsibility of owning a home.

Overall, affordability is key, with 61 per cent of respondents saying it was important that the rent they pay is within their budget. Nearly a quarter (23 per cent) of people said location is a highly significant factor for them.

For investors, the study findings offered some positive signs for future demand, with 69 per cent of all tenants predicting they will still be living in rented accommodation in three years’ time. This view was most common among baby boomers (93 per cent), active living soloists (83 per cent), active living couples (78 per cent) and iGens (74 per cent).

The investment picture

Knight Frank surveyed more than 25 of the biggest funders and developers of professionally managed private rented property, including those in the retirement housing segment.

Key findings showed that the size of the UK multi-housing market, in terms of estimated capital committed, is set to increase more than twofold in the next six years, from £35 billion this year to £75 billion in 2025.

Nearly four out of ten respondents (38 per cent) said they wanted to engage in providing ‘cradle-to-grave’ housing, in some cases encompassing everything from student accommodation to dedicated property with extra care for older people.

Investor views chimed with those of tenants regarding the key priorities of people living in rented property, with investors agreeing that affordability should be the most important consideration in accommodation scheme design and business strategy.

The research also provided some interesting insights into regional trends. Respondents said just over half (53 per cent) of their current investment is in London, but this proportion is expected to fall to 44 per cent over the next five years.

Regional locations could therefore be the focus of 56 per cent of all professionally managed PRS investment activity in five years’ time, which is in line with figures showing that 56 per cent of units currently under construction are in the regions.

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An ‘extremely compelling case’ for investment

Taking into consideration the various trends and traits that define the UK PRS at the moment, Knight Frank concluded that the case for long-term investment in the sector “remains extremely compelling”, despite the uncertainty resulting from Brexit.

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Nick Pleydell-Bouverie, head of the residential investment agency at Knight Frank, said the “growing wall of capital being deployed into the sector is reflective of this”.

“Strong demographic fundamentals continue to underpin long-term institutional investment in PRS, and our growing population, combined with a shortage of housing delivery, continues to create a supply-demand imbalance,” he added.

“Concurrently, we are seeing a significant number of individual private buy-to-let landlords exiting the market as the government’s buy-to-let tax changes start to bite. Large-scale professional PRS landlords are well placed to absorb this, as well as satisfying some of the structural shortfall in our housing supply.”

In seven years’ time, large-scale professional landlords will have invested or committed £75 billion to the UK’s private rented sector.

There is a bright outlook for specific asset classes, particularly student accommodation, which is on course for another year of high activity, according to Knight Frank.

Investors committed to this and other promising segments in the UK’s rental property market can expect to see strong returns in 2019 and beyond.

If you want to find out more about investment opportunities available right now, contact Experience Invest today. Alternatively, you can find out more about us on the Experience Invest Think Luton profile page. You can also follow us on the Experience Invest Twitter page to keep up-to-date with our latest developments.

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