Investment In The Private Rented Sector

UK Government Releases Consultation Paper

Just a few weeks ago the UK Government released a preliminary consultation document that remains open for contributions until 28th April 2010. The document includes many current facts and figures that highlight the current state of investment in the private rented sector. As private sector investors this contained some telling facts and opinions that have an important bearing on the future of private rented property in the UK, and therefore the investment climate for property investors.

I summarize here some of the key findings revealed in the report. If you want to read it in full then here's the link:

http://hm-treasury.gov.uk/d/consult_investment_ukprivaterentedsector.pdf

Background

It has become clear that that a persistent undersupply of housing has been a key contributor to the affordability problems households have faced.

The Government has therefore pursued an ambitious agenda to develop a more flexible and responsive housing market. A key focus has been to increase housing supply and improve affordability, and the Government has set out wide ranging packages of measures for reform of the planning system, and for investment in housing and infrastructure. However, the recent housing market downturn has had a significant impact on supply, making achievement of Government objectives more challenging.

Rod's View - The increases the medium term pressure for prices to rise again!

The Private Rented Sector (PRS) plays a critical role within the housing system, helping to meet growing demand and providing a flexible tenure choice. It has also played a disproportionate role in funding new-build supply in recent years. It is important that the sector continues to grow and develop to help meet the housing challenge, and that it is able to respond effectively to changing demand.

Rod's View - The Government is unlikely to do anything to reduce the importance of the PRS and therefore will not introduce legislation that is likely to be negative for property investors.

Increasing Demand And Falling Supply

Demand for housing is increasing over time, driven primarily by demographic trends and rising incomes. Yet by 2001 the construction of new homes had fallen to its lowest level since the Second World War. Kate Barker's Review of Housing Supply1 concluded that a consistent under-supply of housing was a major factor contributing to the UK's historically high upward trend in prices.

However, the recent economic downturn has had a significant impact on the rate of new build, with net additional housing starts and completions in 2008-09 down 42 per cent and 20 per cent respectively compared to 2007-08.

The fall in supply was driven to a large extent by a reduction in the supply of affordable mortgage finance.

Rod's View - All this just underlines the fundamental lack of supply and therefore the continuing increased pressure on housing prices.

The Private Rented Sector (PRS)

The Private Rented Sector (PRS) fulfils a vital economic and social role, offering households choice and flexibility in meeting their housing needs, whether for the short or the long-term. It is immensely diverse in nature and quality, encompassing a wide range of sub-sectors.

It provides an alternative housing offer for many individuals and households for whom homeownership would be undesirable or unsuitable. There are many households in the PRS who could afford to buy a home of their own but choose not to.

The Rugg Review identified how the sector is highly segmented into niche markets, serving a range of different needs, including:

Young professionals
Students
Households on Housing Benefit
High income households
Housing tied to employment
Older households and regulated tenancies
Immigrants and asylum seekers

The Rugg Review highlighted how for many the PRS is a tenure of choice and provides a long-term home, with over a fifth of PRS households having lived at their current address for five or more years.

For those that need it, the PRS offers unparalleled mobility. Many industries rely on short-term or temporary workers for whom owner-occupation, with its significant transaction costs and lengthy processes, would be expensive and impractical.

Rod's View - This is a great list of the potential tenants you should be targeting, plus an analysis of why rental demand will continue.

The PRS allows households to move easily both within and between regions, leading to a more efficient allocation of labour and skills. The corollary of this is that if the supply of PRS tenancies were to become limited, those needing uncertain or short periods of accommodation in a particular area would find themselves severely disadvantaged.

Rent vs Mortgage Payments and Property Prices

Rent table

Rod's View - This important table shows that up to 2007 there was a growing disparity between mortgage payments and rentals achievable. Rents failed to keep pace with property prices. The impact on BTL landlords was severe with increasing inability to cover the mortgage payments, falling rental yields and naturally an increasing unwillingness to invest.

The property crash has substantially readdressed that issue. You'll see that whilst there is still a disparity it is much less. In addition, Axis approach to negotiating below market value deals, and working in areas of high rental yields, is extremely positive - enabling investors to buck the national trend and make excellent returns!

Decline and Recovery In The PRS

A key factor behind the decline in the PRS was the introduction of rent controls during the First World War, and these became more extensive over time. Artificially low rents reduced investment in the sector, contributing to a tenure shift to owner-occupation and lower maintenance standards in the stock that remained.

A turning point was the 1988 Housing Act - which removed rent controls and introduced short hold tenancies. Despite this key reform, recovery in the PRS was initially slow, with its size relative to other tenures reaching a low point in 1991. Investor confidence remained low following decades of low returns, and in a housing market that was depressed at the time. The low quality of stock that had resulted from rent controls also deterred many potential tenants.

Nonetheless, the sector saw growth of around ten per cent over the 1990's. Growth since 2001 has been more significant, and coincided with the growing popularity of Buy-to-Let mortgage financing.

One Person Households

Rod's View - This table underlines one aspect of the growing demand for rented property through change in demongraphics. The continuing rise in one person households reflects the long term trend to smaller housing units.

BTL Mortgages

BTL Finance

Rod's View - It's no surprise that increased availabilty of BTL mortgage finance has contributed to the development of the PRS. Since 2000, the amount of property financed with BTL mortgages has simply exploded - at least until 2007 when the banking crash severly restricted availability of funds.

There is lots more detail in the Government report but I hope that this is a useful insight into key drivers within the PRS. The great thing for landlords who buy now at the bottom of the market is that they will enjoy low prices, high yields and low costs finance. A magic trio of benefits. Looking forward they are buying into a sector with reduced supply, steadily increasing demand and long terms Government support for the sector. Time to invest methinks!

Checkout our available UK Investment Property

For maximum benefits join Axis NOW - it's FREE!

Live with Abundance

Rod Sig