PRS – the perfect property answer for the Subscription Generation?

Remember the old days when we used to buy things? Music, cars, phones, homes? Thanks largely to the internet and loan-based finance, we are now a generation of subscribers; our music comes from Spotify or Apple, our phones are on monthly contracts, new cars are made affordable via PCP and we digest TV through subscription channels.

So what about housing? Renting a home is nothing new, but the Private Rental Sector (PRS) is going through a change. Where has it come from, where might it be heading, and how significant might its role be in solving the housing crisis?

What’s been happening in PRS over the last 10 years?

According to the Office for National Statistics, the percentage of households in PRS accommodation rose from 13% in 2007 to 20% in 2017 (the latest figures available). This compares with 62% owner occupiers and 17% social housing, also in 2017. The average length of time people rent for is now four years.

While 25-to-34-year-olds are the most likely age group to rent privately, the biggest growth came in the 45-54 age bracket (from 11% to 16%).

Until 2016 the rise in rent prices outstripped the rise in earnings, but since then the gap has narrowed. The average gross weekly household income in 2017 was £696 for PRS tenants, £403 for social tenants and £884 for owner-occupiers.

Who are the future nation’s renters?

According to the Urban Being: The Future of City Living report published by CMS, 72% of so-called iGens (18-24-year-olds) say home ownership is less important, while it’s 56% across all age groups. A total of 61% of all consumers say they would consider renting when they retire. While younger generations still favour shorter rental periods, those heading towards retirement want significantly longer leases, averaging six-and-a-half years, according to the report.

Nine out of 10 real estate professionals expect demand for retirement living to increase during the next five years. At the same time, almost three quarters of all consumers and real estate professionals believe that co-living – where tenants share central amenities and services – will experience increasing demand.

A total of 69% of the report’s respondents also believe that governments should encourage more homes to become available to rent, rather than to buy.

Who are the future nation’s landlords?

Historically, the vast majority of the UK’s private rental landlords have been smaller buy-to-let investors. As house prices exploded, this market became hugely attractive to people as it required relatively low investment and, with lighter-touch regulation, little (if any) experience.

When Government cut subsidies and applied rent caps to social housing stock, housing associations needed to find alternative sources of income. Given that they already rented homes, turning to PRS was an obvious step. They spotted an opportunity to “professionalise” the market dominated by the buy-to-let investors and blighted by poor reputation.

The associations’ desire to develop good-quality PRS at scale attracted institutional investors, previously averse to the management-heavy needs of residential property. Now, they have a management function in the housing association, and with sufficient demand and scale, they can expect reliable yields from in-demand PRS homes.

Buy-to-let landlords, on the other hand, face further challenges from 2020, when valuable tax reliefs that have been available since the 1980s will be scrapped. The Government has already phased out tax breaks on mortgage interest payments, diluted “wear and tear” allowances and tightened the regulation around eviction.

So is PRS (and “build-to-rent”) an opportunity for developers?

If there continues to be demand from younger and older generations, as suggested by the Urban Being: The Future of City Living report, then we might expect PRS to feature as a key part of the new housing mix. A third of the report’s real estate respondents believe PRS demand will “significantly increase” during the next five years. At the same time, there is already evidence that buy-to-let landlords are selling up, no longer attracted to the sector thanks to the tax rule changes and greater protection for tenants.

PRS remains a small percentage of the warranty policies we currently provide, certainly when analysing all LABC Warranty instructions during the last 12 months. Many of these are taken out by builders and contractors working for larger developers or housing associations, but the relatively low proportion suggests, anecdotally at least, that there could be plenty of scope for more PRS and build-to-rent development.

Headwinds against PRS include a continuing slow adjustment of house prices versus earnings, with the big mortgage lenders reporting lower price increases during recent months. This is despite a reported slowdown in the number of homes coming onto the market. Could home ownership be becoming more affordable – however slowly?

At the same time, the main political parties know that the dream of home ownership remains an aspiration for many and a popular policy to maintain. This is despite the apparent demand shown by consumers surveyed for the Urban Being report, and the findings of the Government’s housing White Paper (Fixing the Broken Housing Market) in 2017 which advocated “diversifying the housing market” and encouraging more investment in PRS.

“The market knows best,” as the old saying goes. Time will tell what this means for new, private rental development.

Every care was taken to ensure the information in this article was correct at the time of publication.

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