Private Rental Sector: Following the Herd or Leading the Way?

Hugh Redrup
The topic of the moment in the property market is private rental sector (PRS). PRS are residential developments built solely for private rental, not to sell.

For the individual, PRS offers a premium home at an affordable rent which might otherwise be unobtainable through property ownership due to affordability issues. On the back of announcements from RBS, L&G and Grainger in relation to significant investment into the PRS sector in the last few weeks, Greystar have also just announced they have acquired the former 26.5 acre GSK site at Greenford for a major private rental led mixed use development.

Why Has PRS Suddenly Become So Popular?

PRS has been gathering momentum for a while. James Coghill, head of residential capital markets at Savills, delivered a speech during MIPIM 2014 around the changes in the PRS sector: "Lack of existing standing portfolios means the weight of capital is now moving towards new development to deliver purpose-built PRS blocks. Compounded with the requirement for deliverable net income yields, the focus has also been moving towards more affordable locations and further afield than just London and the South East."

As land values inevitably decline as part of the ongoing property cycle investment, the PRS sector will become more appealing to private investors.

The PRS model has gathered increased traction and evolved due to; the increasing cost of owning property, with first time buyers struggling to find the deposit required, especially in city centre locations; and the UK housing requirement – demand currently outstrips supply by over 100,000 homes per annum making the current model insufficient.

As land values inevitably decline as part of the ongoing property cycle investment, the PRS sector will become more appealing to private investors. The current PRS model means their investment offers a longer term, secure rental income which is far more stable during down turns in the market.

The Favoured PRS Model

The model that currently appears most popular is for private development management companies to work with private investors and PRS service providers to create and deliver a brand associated with high-quality private rental accommodation. Fizzy Living are the first company in the UK who’s raison d’etre is designed specifically to service the needs of young professionals seeking affordable accommodation in the PRS.

However, it is not only young professionals that may be drawn to PRS, both students and people who wish to down-size may also find this an attractive solution. Each joint venture partner can concentrate on their specific expertise in this market and benefit from the others’ experience, expert knowledge and delivery. Be it site finding in optimum locations, negotiating the planning process, designing to the end users requirements, economical financing of the project or operating and maintaining the asset.

In some instances the asset may be pre-sold on to a private investor and in others the asset may be held to provide a regular income stream. 

In some instances the asset may be pre-sold on to a private investor and in others the asset may be held to provide a regular income stream. The retention of the asset by one or other party means that the emphasis on the whole life cost of the building is greater, meaning design & product selection is much more focused with this in mind. Although a common held view is that PRS should be cheaper than a private for sale product the whole life consideration can sometimes mean that more is spent upfront to prolong product life to reduce costs in use.

All Change No Change?

The main differences between a PRS design and a private for sale design are still evolving and can differ from project to project depending on a number of factors. One main area of focus is normally the inclusion of more amenity space/amenities such as more communal outside space, fitness suites/gyms, serviced offices or a retail offering which may include shops, bars & restaurants. These facilities assist in place-making and will help to attract the market but will also help with retention rates. However, if the site is well located and has many of these amenities on the doorstep it may not be necessary to include these as part of the development, thus reducing the development cost.

Optimising Best Value

Where non-residential space is included, the net-to-gross floor area ratio of the building will reduce, as will the number of units that could be provided and hence the rental income. This would also include space provision for site management, communal storage, maintenance and refuse. To gain maximum advantage to the investor, it is paramount that floor plates are planned to optimise the unit size, capacity and efficiency ratios. Whilst on some private for sale developments there may be only one bathroom for a two bedroom flat, on a PRS scheme it is more likely that each bedroom will have its’ own bathroom as it is designed as a premium home.

The challenge is to optimise the product for the end user and developer/investor without affecting the resale value of the building.

The challenge is to optimise the product for the end user and developer/investor without affecting the resale value of the building. Most changes to the design should still render the building attractive for disposal if required.

It looks like PRS will only become more popular. Richard Upton, deputy chief executive of U+I recently remarked: "As the market enters a new phase of its cycle and land values fall, PRS will explode. Costs will fall, but the demand will still be there. The higher costs and lower returns associated with less efficient net-to-gross ratios and non-rent-producing common facilities will be offset by lower land values, making PRS an altogether different proposition." 

Leading The Way Forward

Faithful+Gould has been one of the earliest delivery partners of PRS solutions in the UK even though this format for private housing has not been around on any great scale for very long.

Having completed a 19 storey block of 139 units in Reading at the end of 2015, Faithful+Gould is also delivering cost consultancy on the first forward funded PRS scheme in the UK, a 152 unit building in the London Borough of Ealing due for completion in the fourth quarter of 2016. Also due for completion by Faithful+Gould this year are; 360 units in the London Borough of Newham all presold to a private investor; 125 units in the London Borough of Lewisham in a deal with Fizzy Living and a similar block with Fizzy Living already contracted for completion in 2017; 189 unit block in the London Borough of Hillingdon all presold, due for completion in 2017.

The cost consultant role is not to be underestimated. We can provide advice from the early stages, working with the investor on suitable investment opportunities, conducting feasibility studies on the scheme, providing cost information not just of a singular PRS block but in using this model on major regeneration schemes, for instance we are currently working in the London Boroughs of Greenwich, Brent, and Haringey with some leading private developer clients.

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