Six years on from the government’s launch of the Private Rented Sector Initiative, and two years on from the release of the Montague Report, real progress has been made.
However, it can’t come fast enough for some, and hasn’t come fast enough for many. In hindsight it may be naïve to have thought otherwise, given that “success” will not just be a few purpose-built PRS assets, but in fact the creation of an entire asset class and specialist sector of the housing industry.
Momentum is indeed behind it, but there is more that can be done, particularly when it comes to driving forward the land deals on which these assets sit.
For practitioners of the development of purpose-built PRS housing stock in most of central London – what JLL calls Private Rented Community or PRC assets – it has been clear for some time that, often, the numbers don’t add up. The gross development value of open-market sale products generally trump that of PRCs, typically by 10-15%.
Elsewhere in London, the differences are perhaps more nuanced but still generally tip in favour of open-market sale.
The GLA has recently released supplementary planning guidance which, among a range of housing policy proposals, considers the merits of a covenant for purpose-built PRCs that ensures they remain in said use for a period of 10 to 15 years. This commitment from investors will offset what should be a more favourable planning context, namely concessions on s106 and affordable housing.
Some will ask why this is necessary – if the market can’t deliver it, then why should government provide an artificial prop?
In part there is an important story around improving the living standards of beleaguered tenants, but it has more to do with attracting new capital into residential to boost overall supply. In political terminology, housing supply policies need to focus on “additionality”, or the net gain in housing numbers from new programmes.
The disequilibrium in residual land values between open-market sale and PRCs comes down to the GDV premium that can be achieved with for-sale units, based on the aggregate sales value of the individual units in comparison with the capitalised value of aggregate rents for the same block. In short, with lower land values no PRC models can successfully compete for land – killing off the sector before it ever gets going.
The PRC approach does, however, drive cost savings. With a single investor (or typically a forward funding deal) in place, there are considerable savings in sales and marketing. No suites, no overseas roadshows – and perhaps only one set of agent fees.
The let-up period is also demonstrably quicker than the sales process, reducing the carry cost of debt from construction, which itself may also have savings. There are also premium rents expected, alongside cost efficiencies through the economies of scale, which differentiate PRCs from their buy-to-let cousins.
Taken together, these savings start to converge with that 10% GDV discount. However, they don’t quite get there – not yet, anyway.
The PRC model is in its infancy in the UK. Few fund managers are willing to fully price these savings or rent premiums into the model while the case for PRCs remains a theoretical one. We may yet see full convergence with for-sale GDVs in the future, but to underpin the creation of this asset class in the UK, government support is still required.
Ironically perhaps, the arguments for PRCs are stronger in the regional cities, where yields are around 100 basis points higher in Manchester and as much as 250 basis points elsewhere.
Sales markets are also more finely balanced (without the important overseas investor sales story to underpin development finance). As the UK’s economic recovery becomes more widely entrenched, investment in the regional PRC story is spreading – and I suspect will grow more quickly than in London even without the supplementary planning guidance support being given by the GLA in the capital.
So London may yet prove to be the exception rather than the rule. However, renting is the fastest-growing tenure and deserves a step-change in quality. That additionality point is also a powerful one in the context of the desperate need for more homes.
The ongoing SPG consultation by the GLA is an important step for PRCs in London and deserves our support.
Adam Challis is head of residential research at JLL
