Interviewer: Andrew, the residential private rented sector seems pretty buoyant at the moment.  Is it and if so why?

Andrew: Well, I certainly think it is buoyant at the moment.  The government’s PRS task force over the last two years has estimated that they think there’s about 10 billion pounds ready to invest now, straightaway and that is probably a conservative estimate.  But the reasons why there is so much interest in the sector is really it's a time of opportunity, it’s justified by supply and demand and demographics. Basically, there aren’t enough homes to house the number of people that need somewhere to live.  The population is growing.  People can’t afford to buy homes until later in life and a lot of time younger people don’t want to, they want flexibility, they want choices, they want to be able to pick where they live, they want to be able to move around and its often a lifestyle decision.

Interviewer: And you’ve worked on some pretty big transactions and as things are changing and slowly they are changing with different legislation, how are investors changing as well?

Andrew: Well, acting over the last few years on a number of projects through the government’s and homeless and community agencies billion pounds private rental funds that was designed to actually help get this sector off the ground, we’ve seen a lot of transactions evolving and although there is a lot of growing interest from investors there is a shortage of stock to buy.  You can’t just go out there and buy already built thousands of new homes so investors are having to look at how they get involved in schemes earlier because of the amount of competition.  That means they’re having to look more at forward funding or forward purchasing new developments rather than simply going out and buying things that have already been created.

Interviewer: But where’s all the land going to come from for these projects because of course in cities up and down the UK it’s very difficult.

Andrew: Well, in terms of the cities themselves that investors are looking at, things started very much in London and the South East but now we are seeing a lot more interest in other parts of the country because of people wanting to find the opportunities to buy. So cities such as Manchester, Birmingham, Liverpool and Leeds and in fact outside London the yields are often better for investors and the schemes can work for them more easily. But in terms of new land and where is the land coming from, people think that the public sector has got a big part to play in that in releasing more land and one of the transactions we recently dealt with that’s been quite high profile, London Legacy Development Corporation and their 1500 unit scheme at the Queen Elizabeth Olympic Park, that sort of illustrates how the public sector can be innovative bringing forward land for housing but retaining an investment interest themselves to share alongside the developer, sharing in the success of the project and the on-going income from it.

Interviewer: So looking ahead now at the future, what are the issues you would draw out.

Andrew: Well, the market is getting more used of what’s going on in the sector now, thinking its evolving and clarifying around how you value these assets, how you value a PRS block and that’s involving new approaches to valuation which are more like valuing a business than just an empty apartment. Tax is a big thing that people are thinking about because the margins are quite tight on PRS investments and you can’t afford to be losing anything through irrecoverable VAT costs so that necessitates a lot of very careful early planning.

The planning system, people are getting used to the ideas of what’s going on in planning and dealing with the local planning authorities and negotiating better terms often tied up with restrictive use covenants that mean you get a preferential deal on planning but you have to commit to leaving the asset only available for PRS for a minimum number of years.

I think, finally, I would mention as well the recognition that developers are seeing of the potential in PRS because one of the benefits is by building a PRS block they can sell it in one go, they can sell several hundred apartments in one transaction and then they can move on to the next development.  What they don’t have to do is plan for the slower release of apartments on an individual sale basis so hopefully more homes get built much more quickly.

Interviewer: Andrew, thank you.


The current state of play in the UKs private rented sector

The private rented sector (PRS) is particularly buoyant at present. 

In this short video, Commercial Real Estate Partner Andrew Yates looks at the evolution of transactions in the sector, growing interest for private rented sector investment and how opportunities are now opening up in cities outside of London including Manchester, Birmingham, Liverpool and Leeds. 

Andrew will also look at some of the issues facing the market as well as touching on why the potential of private rented sector is so appealing to investors.

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