Tenancy in the UK

The signing of a massive development loan for build-to-rent homes next to Wembley Stadium has brought the UK private rented sector back into the spotlight.

The old adage says an Englishman’s home is his castle. A growing number of developers are keen to see not just English men but British men and women rent their castles, long-term.

The institutionally-owned private rented sector (PRS) has long been a feature in some countries. In the UK, home ownership is the obsession and renting seen as a temporary measure. Traditionally, young adults would save for the deposit on a mortgage while renting from a private landlord with whom they would agree short-term leases and call in the middle of the night if the bathroom tap sprung a leak.

However, the UK is in the grip of a housing crisis. Housebuilding has failed to keep pace with demand and house prices have lost touch with average incomes. Many, including families, have been forced into long-term renting.

This week’s Redfern Review into the decline of home ownership suggested that an independent housing committee was needed to address the problem in the long term. It also pointed out that “a fair housing market also needs both a healthy private rented sector and a supportive social housing sector”.

Enter the developers, which see the opportunity to create the sort of modern, purpose-built stock that punters would be happy to rent for years on end.

Critics of build-to-rent PRS argue that it is an attempt to capitalise on those with enough money to pay fairly high monthly rents, but not enough to get anywhere near the housing ladder. Proponents counter that such product offers flexible living arrangements in modern, well-regulated housing.

The fledgling UK build-to-rent market was in the spotlight this week with the £800 million ($998 million; €930 million) financing – provided by Wells Fargo, AIG and CPPIB – of Wembley Park, which sits adjacent to the world-famous stadium in north London. The scheme’s developer is Quintain, since last September a subsidiary of US private equity giant Lone Star. The firm plans 4,850 homes, many of which will be available to rent through Quintain’s PRS business, Tipi.

Also this week, Real Estate Capital reported that the UK government has approved more than £700 million of PRS investment loans, which will be written by debt fund manager Venn Partners and funded through government-guaranteed bonds.

However, the champions of PRS admit that the market still has major challenges. At this week’s CREFC Europe autumn conference, one institutional real estate fund manager said that central government needs to reconsider the tax system for build-to-hold, adding that it also needs to provide more planning guidance and advice on affordable housing provision.

“One local planner thought we were intending to build 400 units and sell them off, one-by-one,” said Dan Batterton, fund manager of the build-to-rent team at Legal & General’s LGIM – Real Assets. “However, there is a shift in government policy away from the obsession with home ownership to just wanting more front doors.”

Batterton added that his firm wants to develop PRS in order to hold it and fund its pensioners with long-term, stable income: “Existing housing stock is not designed for renters, so we decided that we’ll have to build everything we own.”

To the charge that the PRS will merely aggravate the shortage of for-sale housing stock, Batterton argued that such schemes bring net new money and new properties to the UK’s residential market. Challenged that the land for those schemes could alternatively be used to build homes for private sale, he argued that building with a 30-year return requirement unlocks previously unviable sites.

Lenders on the panel agreed that PRS has a future in the UK. Ali Imraan of LaSalle Investment Management said: “So long as alternative asset classes (such as PRS) continue to demonstrate that they can generate predictable cashflows, they will continue to be attractive for a wide range of institutions.”

A thriving build-to-rent market in the UK remains elusive for the time being, but deals such as the Wembley Park financing show that it’s coming. The question is whether the public will swap owning their little piece of Britain for long-term renting in shiny new properties.