Case Study: Investing in The Private Rented Sector

28 Mar

Case Study: Investing in The Private Rented Sector

Introduction

Buy-to-Let (BTL) has been the go-to-option preferred by many property investors for decades. However, with government policy in some cases making the sector less attractive, an alternative has emerged in the form of hands-off investment in the purpose-built rental apartment market.

Here we look at some of the factors contributing to the rise of alternative property investment.

The Private Rented Sector

The private rented sector (PRS) accounts for 20% of all UK households, with a quarter expected to be renting by 2021.

While the sector has been traditionally dominated by buy-to-let landlords, investor and developer led PRS schemes have risen prominence over the last 5 years.

Purpose-built rental developments are specifically aimed at affluent individuals looking for quality accommodation, that meet the demands of living. Complexes are designed to create a community, with amenities such as: a concierge service, gyms, shared workspaces, SMART technology, and communal rooftop terraces.

Across all age groups, except the 75+, renting is becoming more common with the number of 35-44-year olds renting doubling from 13% to 26% and rising from 8% to 14% amongst those aged 45-54. While, 25-34-year olds are the largest group living in the private rented sector, making up 35% of tenants.

Build-To-Rent

Research by Savills shows that in 2016/17 Build-to-Rent (BTR) developments made up 8.7% of new housing starts.

The total number of BTR units completed/under construction or in longer-term planning pipeline in the UK stood at 139,000 in Q4 2018, a 22% increase on Q4 2017.

Rapid growth in the sector has been driven by both domestic and overseas investors. The number of BTR units under construction across regional cities (24,000 units) is now higher than the number being built in London (19,000 units). In total 43,900 units are under construction as of Q4 2018, a 39% increase on Q4 2017. While the number of units completed stood at 29,416 at Q4 2018, a rise of 29% year-on-year.

BTR developments have become a common feature of regeneration zones in London and across regional cities.

City Centre Growth

Between 2002 and 2015, the number of people living in city centres across the UK increased dramatically.

According to figures from the Office of National Statistics, Liverpool had the fastest growing city centre with the population rising by 181% (9,100 to 25,600 people).

Other major regional areas to see substantial growth in city centre living were: Birmingham 163% (9,800 to 25,800 people); Leeds 150% (12,900 to 32,300 people); Manchester 149% (14,300 to 35,600 people); Sheffield 139%; and Milton Keynes 113%.

By numbers alone England’s fastest growing city centre was London with an increase from 268,700 to 327,200, people. Though this only amounted to a moderately low rise of 22%.

One of the main contributors to population rises in city centres is young people, specifically young professionals.

A Centre for Cities report showed that in the first decade of the 21st Century the number of 20-29-year olds living in city centres tripled, and there’s no reason to believe that the trend will ease.

More than a third of city centre residents had a degree, and ¾ rented an apartment. Only 1 in 5 were married or in a civil partnership.

Employment opportunities in growing sectors are attractive to young professionals with Manchester city centre jobs rising by 84% from 1998 to 2015. While in Newcastle the digital and technology sector grew by 154% between 2011 and 2016.

Another factor driving young professionals to city centres and BTR apartments is the closeness to amenities such as cafes, bars, restaurants, and gyms, as well as work with 32% walking to their jobs.

Summary

With 5 fully exited private rented sector projects under our belt, Keystone believe in the longevity of purpose-built rental apartments as an investment. Growing demand, rising employment, confidence in regional cities, want for high-quality accommodation, and attractive passive income returns are responsible for the sector’s continuing strength. In 2018, across three projects our investors saw an average 21% return per investment and an accumulative total of 63%. Over the next few years, and with a pipeline of additional BTR investment opportunities, the asset class is forecast to continue thrive, and provide long-term returns.

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