Savills World Research UK Residential Spotlight Rental Britain February 2016 SUMMARY Demand for rental homes will continue to rise despite Government policies ■ The rental market will still expand large-scale investors to step into the forward fund development for rent. by more than one million households gap created by a fall in off-plan sales We outline some of the routes to over the next five years despite to buy-to-let investors. P2/3 market that large-scale investors are measures to turn “generation rent using. P4/5/6 into generation buy”. P2/3 ■ Mismatch between supply and demand will continue to underpin ■ Investors are looking beyond ■ The supply of rental homes is set to rental growth and attract increasing London to cities with concentrations of be constrained by the introduction of numbers of institutional investment at households in the rental market. Our a Stamp Duty surcharge of 3% scale. We recorded investment deals investment matrix highlights the cities on buy-to-let properties and the worth a total of £2.6 billion in 2015 with the best investment potential. restriction on tax relief on mortgage – a third of which was supported by Manchester, Reading, Edinburgh and interest payments. Both measures institutional investment. P2/3 Bristol top the chart. P7 are likely to limit the ability of private investors to expand their portfolios. ■ The lack of available stock is This presents a major opportunity for prompting an increase in deals to savills.co.uk/research 01 Spotlight | Rental Britain Market dynamics Policy changes Government housing policy seeks to RENTAL BRITAIN reverse this trend with the target of delivering 400,000 affordable homes for sale aimed at helping people HERE TO STAY access the property ladder over the course of this parliament. Measures include the delivery of 200,000 Starter Homes, the building of 135,000 new Shared Ownership homes and access to larger equity loans through Help to Buy in London. The rental market will still he economic Without policy interventions, expand by more than one million recovery and ongoing we forecast that the rental market low interest rate would grow by an average rate of households over the next five environment have done 260,000 households a year in the UK. years despite the Government’s little to reverse the The Government target of building Texpansion of the rental market. In 400,000 affordable homes for sale drive to boost homeownership fact, house price inflation, which would enable an average of 80,000 has surpassed wage growth, has new households a year to access served to push homeownership homeownership over the further out of reach for many. next five years. The requirement for sizeable Of the 80,000 new households a deposits and stricter lending criteria, year which may be helped onto the as a result of mortgage regulations, property ladder, 40,000 are likely to have continued to act as barriers come out of the rental market with the to the property ladder. As a result, balance shifting out of other sub- demand for rental homes is still rising, market tenures. This would reduce underlining the long-term trend which the growth of the rental market by predates the financial crisis of 2007. 15% from 260,000 households a year According to the Government’s English to 220,000 new households a year. Housing Survey, the rental market has Hence the sector will still grow by 1.1 been growing by a staggering 17,500 million by 2021. households per month on average over However, we would question the 10 years to 2014. whether policies can accelerate house building enough to deliver 400,000 affordable homes for sale FIGURE 1 in the first place. Given the overlap The growth of the rental market Areas where more than 15% of between the schemes, which are households rent privately focused at similar parts of the market, it is possible that one scheme would simply replace the other rather than 1991 2001 2011 providing additional homes. Without the higher house building numbers, it is unlikely that the Government will achieve these targets. Supply constraints Policy changes aimed at residential property investors are likely to put further pressure on the already constrained supply of rental homes. From April 2016 purchases of residential properties over £40,000 for investment will attract an additional surcharge of three percentage points above the current rate of SDLT. Hence a buy-to-let investor acquiring a property worth £500,000 would pay an additional cost of £15,000. This stamp duty increase follows a restriction of tax relief on mortgage interest payments for buy-to-let investors with debt set against their Source: 1991, 2001, 2011 Census property. Both measures are likely 02 February 2016 to limit the ability of some private FIGURE 2 investors to expand their existing National spread of deals 2015 portfolios or buy their first investment property. The withdrawal of tax relief may also prompt some to rationalise their portfolios although we are not expecting a mass exodus from ■ London (60%) buy-to-let. The experience of the last ■ North West (9%) downturn suggests that most are ■ South West (7%) long-term investors. ■ South East (6%) The Government is consulting on ■ UK-wide Portfolios (5%) the policy detail, including whether ■ East Midlands (4%) an exemption for corporates and ■ Yorks & Humber (4%) funds owning more than 15 residential ■ East of England (2%) properties, is appropriate (see Policy ■ West Midlands (2%) Response: Additional Homes Stamp ■ Scotland (1%) Duty Surcharge). ■ North East (0%) We think it highly likely that corporate investors will remain exempt from these tax changes and that the appetite from housebuilders to secure Source: Savills Research deals with large-scale investors will grow strongly in 2016. Housebuilders have relied heavily on FIGURE 3 off-plan sales to buy-to-let investors, Rising levels of investment particularly as their banks and debt funders very often require evidence 3500 of sales to de-risk the development. As a result, there is a big opportunity 3000 for large-scale investors to fill the gap through forward funding structures. 2500 Large-scale investment 2000 The mismatch between supply and demand for rental homes is likely 1500 to underpin rent rises, particularly in undersupplied markets. It also 1000 represents an opportunity for institutional investment at scale which Rolling Annualised Investment £ mn 500 has been growing steadily. Some big domestic and international players 0 have entered the rental market and the 2011 2012 2013 2014 2015 flow of capital is building up. Source: Savills Research The overall value of deals recorded by Savills own investment database has increased from £2.3bn in 2014 FIGURE 4 to £2.65bn in 2015. The number of Institutions becoming more dominant players deals backed by institutions doubled between 2014 and 2015. Last year ■ Private Company ■ Registered Provider ■ Private Equity ■ Institution ■ Public Company ■ Fund Manager ■ Developer (2015) over 30% of all rental market 100% deals were backed by institutions 90% compared with 22% in 2014. Private companies also represent 80% a significant part of the sector, 70% accounting for 40% of deals. 60% As the market evolves, we are seeing a shift in the corporate-backed 50% rental market from one in which 40% investors purchase ready-made 30% schemes to one in which forward funding development is becoming 20% increasingly prevalent. This document 10% outlines opportunities for investment 0% and development in the rental market 2011 2012 2013 2014 2015 as demand is here to stay. ■ Source: Savills Research savills.co.uk/research 03 Spotlight | Rental Britain Investment ROUTES TO MARKET There is more than one way to raditionally, larger and Patron Capital’s acquisition of investors in the rental Cala Homes. Further to this, the invest in the residential market market have built up acquisition of Quintain by Loanstar has for large-scale investors portfolios through the potential to see a large amount of the acquisition of rental market stock being delivered Texisting residential stock. Since through the development opportunities the introduction of the buy-to-let in Quintain’s pipeline. mortgage, the market has grown Aggregators of rental stock are also through buy-to-let investors increasing in numbers with the likes acquiring a high proportion of of Essential Living and others, where newly built residential stock that we may find that once developed and was built and designed for the stabilised, these portfolios may be owner-occupier sales markets. sold to the institutional market through Developing new stock for private large portfolio sales or corporate rent is a relatively new feature of the transactions. residential investment market. It is A key challenge for investors is the a response to the reintroduction of identification of an operating partner to institutional capital seeking investment manage the portfolio. The aggregators grade assets and the limited supply are tending to create new branded of good quality stabilised portfolios. management services developed It is also a result of the recognition alongside the asset pipeline whilst the that delivering a customer-focussed institutions are more likely to outsource service to tenants requires a variation the management function. FIGURE 5 in the design and construction of As the institutions get more Routes to market residential buildings. comfortable with residential as an For larger, institutional investors, asset class we are likely to see a gaining exposure to the UK residential range of markets emerge from prime ACQUISITION OF market in its broadest sense, is likely bespoke stock to secondary and even to see various investment strategies tertiary stock. As these investors are EXISTING STOCK being deployed. In simple terms, this primarily driven by income returns can be achieved through developing – as long as the net income from a bespoke buildings on an asset by portfolio can be proven, assessed JOINT VENTURE AND asset basis.