Matthew Benson: Rental sector built on solid foundations
The private rental sector, often referred to as PRS, has grown at an incredible rate in recent years '“ to the extent that industry commentators now agree it will come to be seen as one of the single largest defining factors of the Scottish housing market in the 21st century.
PRS in Scotland has gone from roughly five to 15 per cent of total households since the late 1990s and doubled in size since 2004 – increases indicating that not only is private rental a seismic shift on the property scene, it is also of great economic and societal significance to the nation as a whole.
Akin to the rest of the UK, Scotland continues to face a chronic undersupply of housing, a factor in the rise of the private rental sector, with the nation’s owner occupation rate dropping by over five percentage points since 2009 to approximately 60 per cent today. The vast bulk of PRS is provided by owners each with a single or a small number of properties but what is coming of age across the UK is the emergence of “build-to-rent”, PRS at scale provided by pension funds, housing associations or even local authorities.
The popularity of build-to-rent was underscored for us in Edinburgh recently, when 3,500 people applied for the 96 units on offer at the Harbour Point development, where we worked with Forth Ports and The Cruden Group. Our “house view”, excuse the pun, is that if the right units are put up in the right places then filling them will be relatively straightforward, such are the demand/supply imbalances.
While political uncertainties remain on the horizon, the London bubble has led to investors hunting value across the rest of the UK and Scottish cities stack up well in the value proposition stakes, characterised as they are by lower entry level prices and higher yields – in fact, three of the highest gross rental yields in the UK are currently in Glasgow, Dundee and Aberdeen.
Issues around affordability and lending have meant that levels of owner occupation have been declining in all except the older age brackets. This, combined with limited new build supply in the main economic centres in Scotland, is having a strong impact on rental values.
Our own research suggests residential properties for rent in Scotland will provide investors with a good yield, along with appreciation on both capital investment and rent levels – each expected to grow by around two-five per cent per annum on average over the next few years. Our director of research, Dr John Boyle, views the provision of this investment as “the biggest potential game-changer” for housing provision in Scotland.
When you consider that Scotland has approximately two per cent of the build-to-rent pipeline compared to something in the region of 50 per cent concentrated in London, you get clear sight of the potential.
What institutional investors are telling us is that many of them paused for thought when it came to investing in Scotland with Brexit looming and Indyref2 a distinct possibility. However, some deals are now happening as investors see the strong fundamentals in the housing market and the benefits of “first mover advantage”.
To date, the market has been focused on prime sites in city centre locations but these deals are inherently hard to do and the completed properties need to command top-end rents. The numbers indicate that there is an alternative largely untapped market to provide good accommodation at a reasonable price in useful, albeit non-prime locations.
Using the tools at our disposal in Scotland, we need to focus on closing the gaps and setting the groundwork for affordable, mid-rent accommodation to fuel the redevelopment of our brownfield land in and around our major cities.
With Holyrood’s ability to set most property taxes, we now have the necessary tools to stimulate the investment that will deliver long-term results for our pension funds while providing stable, high quality homes to help attract the businesses and jobs needed to grow the economy.
• Matthew Benson is director and head of development services at Rettie & Co