Big investors or buy to let? Who owns private rented homes is changing
Private rented housing in the UK has traditionally been delivered by small to medium sized landlords renting out properties. These tend to either be financed by buy to let mortgages or homes that were inherited or kept as people moved to a different place. The chart below shows how the number of households renting privately has increased significantly following the widespread availability of buy to let mortgages since the late 1990s. Other factors have also contributed, most notably changes to first time buyer mortgage availability after the 2008 financial crisis and consistently low levels of new housing supply, which have impacted on people’s ability to afford to buy a home.
The buy to let sector has been impacted by multiple legislative, regulatory and tax changes over recent years as well as the rapid increase in interest rates. It is, as a result, being seen as a more complicated system to operate within and a less attractive investment. Changes include piecemeal changes to legislation around things like property quality, income tax changes which meant mortgage costs could not be offset against rents and future regulatory changes coming in the form of the measures in the Renters’ Rights Bill and Minimum Energy Efficiency Standards.
While these changes may have some advantages, for example causing bad landlords to leave the market, they are also impacting on good landlords offering a higher quality proposition. Landlords leaving the market is having an impact on tenants with agents receiving 19 enquiries per property compared to a pre-pandemic average of eight. The situation is even worse in some cities with Glasgow having 52 tenant enquiries per property (stricter rental rules including a form of rent caps have been set by the Scottish Government) and Bristol having 51.
A combination of high demand for rented homes and low supply driven affordability problems for potential buyers is attracting a different set of landlords into the market. Large scale private investors.
From Aviva, L&G and Lloyds to international players including Blackstone and the Canadian Pension Plan Investment Board British homes are increasing in their sights. The chart below from the FT shows the increase in private capital investment in UK family homes.
Attracting this type of larger investor into the sector has been talked about for a long time and was often seen as the best way to improve the offer from the sector. The idea is that an investor providing rented homes seeking a long term income stream and having size and scale, as was seen in many other similar countries, would focus on long term lets, transparency on rent increases and be quicker to provide repairs and maintenance.
Others have continued to argue that smaller landlords are better: That they can offer a more personalised service, often live locally to their properties and can take more personal decisions on things like rent rises or support in times of difficulty for their tenants.
Given these two viewpoints, what are some of the issues we might need to think about if the trend for private equity investment in private rented homes continues?
What types of home are being provided and who is living in them?
Larger scale investment in the private rented sector has largely focused on the more expensive end of the market, often offering a premium product or on specific niches such as student housing.
As a result larger scale providers are unlikely to offer a broad range of housing sizes and types across all different prices ranges. They may also restrict themselves to certain geographical areas where they know there is demand for a specific type of product (e.g. close to universities) or people willing to pay for access to premium services search as an onsite gym (likely to be young professionals in major cities).
Even where new growth is occurring, as set out in the FT, it is a very specific type of family home and likely to be delivered in an area where the best yields can be achieved.
Corporate services vs local attention and the need to enforce standards
There are also likely to be trade off with a larger provider offering a different type of management and repair service. Rental properties which come with high level professional management and quick repair times are likely to linked to a premium rental product, rather than more mid-market homes. A more corporate approach with things like KPIs may actually mean that small non-urgent repairs get carried out less quickly. We’ve also seen from the housing association sector that size and scale does not necessarily automatically lead to better maintained homes.
A more local approach with a locally based landlord or preferably agent may actually provide for more efficient repairs and a lower cost. Knowing a local area and relevant local tradespeople could provide an advantage for smaller scale landlords, enabling them to offer a more bespoke service.
Most importantly the quality of rental properties in both the private and social rented sectors needs to be improved. Government needs to set minimum standards for rental properties and ensure they can be enforced through more investment in local authority trading standards and environmental health enforcement. Tenants and good landlords befit when bad landlords leave the market.
Demand for properties and the need to build more homes
The other challenge we may face with these larger investors entering the market, particularly if they are buying individual family homes, is a greater affordability challenge for first time buyers.
Another sign that we need to be building more homes across the UK to ensure that people can access a home they can afford, whether that is ownership, private renting from large investors or a buy to let landlord or social housing.
Implications for Government policy
The increase in private equity interest in family homes for rent adds to the factors that need to be taken into account when Government is thinking about housing policy. A shift from smaller scale to larger scale private rental investors may require a different set of rules and regulations than currently exist around the private rented sector.
It may also increase the already significant demand for more supply of genuinely affordable social housing if the full range of market segments aren’t being met as a result of any changes to the PRS. Potentially some of the private investment could be secured to support this type of housing which would deliver the long term regular returns investors are looking for.
Housebuilding policy may also need to adapt if investment in private rental leads to a demand for new family homes. With local support for new housing development already difficult to achieve there might be even more vocal opposition to new homes if they aren’t being seen to support people into ownership.
The future for private renting
Ultimately there is a need to increase supply to accommodate all different tenures so tenure becomes a tool by which people can find the approach to housing which suits them best rather than different actors competing for the same limited supply of homes.
This will enable different providers to fit into the most appropriate part of the wider housing market to provide homes people need and a return on investment. This would allow owner occupation to exist alongside multiple forms of private rented provision. It may also enable wider investment in social housing from government and others where that support is necessary.
Driving new housebuilding, ensuring all homes are good quality and that people can afford a suitable home should be the key for all involved in the housing sector.