Richard Rennie on new residential letting developments
WHERE do you stay? That’s very much a Scottish question – “stay” needs replaced by “live” to make sense in the rest of the UK. But for a growing number, they are not staying but moving, and the private residential letting market is adapting in response.
The UK’s private rental sector (PRS) is going through a period of rapid change. It is an exciting time for those involved – whether they be developers, investors or the end users – the tenants - themselves.
The sector has had a chequered past. One hundred years ago, the private rental sector accounted for approximately 90 per cent of all homes in the UK. Fast forward 75 years and the effects of war, rent controls, right to buy, over regulation and a vast increase in public sector housing supply, and the picture was radically different. The private rental sector appeared to be on the way out.
The position has further changed in the last 25 years. There has been growth in the private rental market, but demand has been largely met by private “buy-to-let” landlords, many of whom only own one or two properties.
During that same period, demographic and social changes (rises in house price, student loans and an increasingly mobile work force with a greater number of temporary workers from overseas) mean that the average 30-year-old was an owner as recently as 10 years ago, but is now a renter.
Further changes are on the way that might put off the small scale buy-to-let investor – recently announced tax changes (restricting mortgage interest relief to 20 per cent) as well as a stream of legislation on deposits, managing agents, landlord registration, and health and safety to name but a few.
In addition, the Scottish Government has recently completed its second consultation on reform of private tenancy legislation. The Government is considering ways to give tenants more security by limiting the landlord’s right to recover possession and allowing longer lease terms. What is worrying for developers and investors is that it is also toying with some ability to control rents in property “hot spots”. Governments rarely learn from past mistakes of over regulating in this area.
In the meantime, the market solution may come from the emerging “build for rent” (BFR) sector. This form of PRS sees pension funds and other institutions financing large scale development of new housing specifically built for rent not sale. This is a great opportunity and brings in new sources of finance, will raise standards of accommodation, and ultimately give a more stable market.
This can readily be seen in London which is at the forefront of the new wave of investment and development in the PRS sector. There is no doubt that this is a good thing for the current and next generation of workforce in London who need to be accommodated to keep the capital’s wheels turning (and schools educating, hospitals healing, and so on).
Up here in Scotland, we are also seeing the changes that this emerging market will bring. My firm acted for high-end developer Dandara, in developing and selling a 292 unit BFR scheme at Stoneywood, Aberdeen to LaSalle Investment Management (a deal worth approx £60m).
This is aimed at the medium term occupancy rental market and is the first of that scale in Scotland. It shows the appetite of pension funds looking to achieve regular income in a world of low-interest gilts where their investors are shunning annuities. It also demonstrates ongoing confidence in the Aberdeen market, which was thought to be on the retreat following the collapse in the oil price.
There is no doubt that PRS and BFR are here to stay, wherever you live!
• Richard Rennie is a Partner with Burness Paull LLP www.burnesspaull.com