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January 26 2016

3 reasons why PRS is the UK’s fastest growing property sector

January 26 2016

3 reasons why PRS is the UK’s fastest growing property sector

Author: Amber FurrCategory: UK Property
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After five years of substantial growth, Britain’s private rented sector is now worth £1.29 trillion. So what’s driving this unrelenting demand?

In a report outlining exceptional capital growth across the board, it was the rise of one sector in particular that arguably caught the greatest attention.

After an incredible 55% uplift in the total value of its assets in just five years, the UK’s private rented sector (PRS) is now worth £1.29 trillion. The analysis from Savills highlights that the sector’s value has now passed that of mortgage-owned occupier stock for the first time, not only reflecting the volume of properties but how valuable each PRS asset now is.

It is stark growth for a nation widely associated with homeownership. With close examination, there are a number of fundamentals that have helped drive the sector’s uplift in value and, indeed, its demand from investors:

1. Changing Generational Attitudes Towards Homeownership

Property is a British obsession. It’s a topic of great interest in a country where property prices get as many column inches as the latest football scores.

Homeownership has traditionally been one of the great British ideals. Of course, there are many renters out there who still harbour aspirations of getting onto the property ladder. But for many others, things have now changed.

For a generation of Britons, homeownership no longer equates to success. 75% of workers are prepared to relocate cities to find work, while 25% of 16 to 34-year-olds aim to have 12 jobs in their career. Owning a home makes these life goals considerably less achievable.

A group of young people engaged in conversation, laughing and smiling whilst catching up in a coffee shop. One man shows the rest of the group something on his mobile device.

A recent Savills study found that a third of the people that rent their property in Britain are ‘satisfied tenants’ – renters that harbour no ambition to buy property in the next five years, and who prefer the flexibility that rented accommodation provides.

By 2025, owner occupation levels could fall to just 60%, compared to a peak of 69% at the turn of the millennium. For many rented living is no longer a means to an end, a temporary solution whilst they wait to buy ─ it’s an active lifestyle decision.

2. Key Future Growth Indicators

PRS property is an asset class with an outlook that investors simply cannot ignore.

Yields were up by an average of 3.8% across the UK in 2015, with growth in key regional cities of 4.9% in the final quarter of the year alone. And this strong performance looks set to continue in the coming years, with Rics forecasting that rental rates will grow by 25% and outpace house price growth over the next five years.

An aerial image of hundreds of people on a white floor arranged in an order to make the shape of an upward moving arrow.

20 million currently privately rent in the UK, and that number is expected to rise over the next 10 years. An additional 1.8 million households will be renting in the PRS by 2025, accounting for almost one in four British households.

But it’s perhaps the country’s dwindling levels of housing supply that underlines the continued and future growth of the PRS. As demand for rental accommodation shows few signs of slowing, the UK’s shrinking property levels are buckling under such sustained pressure, meaning that much more investment is still needed. Indeed, recent figures calculate that Greater Manchester, for example, will have 1,500 more families than homes by 2026 if current house build and population levels remain the same.

3. Clear Emerging Investment Subsectors

As Britain’s appetite to live in rental property has grown, so has its desire to invest in it.

For two million people in the UK, buy-to-let property has delivered 1,800% in returns in just 18 years. A 16.3% annual rate of return from buy-to-let investment since 1996 eclipses those generated from any other popular asset class.

Three mens in high viz jackets and hard hats on a construction site, looking up and pointing towards a crane that's in operation and working on the developments in the background.

But as people’s attitudes towards rented living have evolved, so has the PRS. With tenants demanding more from the accommodation that they’re now spending, on average, 12 years living in, buy-to-let is no longer the only solution. New subsectors of the PRS have now emerged, driving investment levels.

Build-to-rent is arguably the most significant of these subsectors. High-quality city centre properties, fully-managed by professional management teams, and located within a community of tenants with shared values. Knight Frank believe that by 2020 the build-to-rent sector could be worth £50 billion alone.

Click here to download your free guide – Manchester: An introduction to the UK’s strongest investment city.

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