The private rental sector could prove to be one of the hottest emerging markets and a key symbol of strength in the West Midlands this year.
After several years being off institutional PRS investors’ radar, at least two companies are expressing significant interest in build to let in the region, with two more waiting in the wings.
The most developed interest, revealed exclusively in EG last month, is by IM Properties which is to make its first foray into the PRS sector with a minimum war chest of £100m to invest across the region, using the in-house expertise of its private homes arm, Spitfire. And now Grainger has stepped into the frame by naming Birmingham as one of five cities being assessed with a view to PRS investment in 2014.
So why this sudden surge of interest? It is down to “a perfect combination of factors” according to Mark Birks, land and development director at GVA’s Birmingham office.
“Three years of good rental growth and the prospect of rental inflation for up to 10 years to come, has helped to persuade investors. The 5,000 units in Birmingham’s residential pipeline in 2005 are now hotel rooms or student accommodation – they’ve all gone – and numbers of pipeline schemes now are pretty limited. And Birmingham council has identified a need for 13,000 new core central homes. That is all good news for investors,” says Birks.
Knight Frank says PRS growth means 13% of the region’s households now rent privately, rising to 18% within Birmingham (see box).
Meanwhile CBRE, which is preparing a nationwide analysis of urban rental markets, says Birmingham has a relatively young age structure, is set for population growth of 85,000 in the next decade, and will see more rental growth “as the financial and business services sectors grow”. Adrian Willet, director at CBRE, added: “There is now a growing confidence in Birmingham’s rental sector after five to six years of very little activity. Pent-up demand could see the first 1,000 PRS flats let very quickly.”
Against that background, it is perhaps unsurprising that the regional PRS is attractive.
IM Properties’, advised by Spitfire, is now looking to the West Midlands – and particularly in Birmingham – for build-to-let schemes “to create a new branded marketplace”, according to its Spitfire director John Scott.
The firm’s £100m investment may involve up to six sites regionally with Birmingham the central focus. Each site may have around 50 units, probably apartments and possibly houses.
“London has high rental income so can afford high-end facilities such as concierges in its build to let. In the West Midlands, affordability will be key, especially when it comes to land prices, and design and layout will reflect that. There may be standardisation across sites of leases, maintenance, management, car parking and so on,” explains Scott.
Cost concerns
Of particular concern to the company is the cost of sites – “probably the most critical factor in deciding what we do and where”, adds Spitfire’s managing director David Jervis.
Grainger – which already manages an estate in Birmingham‘s Harborne district where its regional office is based – has a UK-wide £403m investment war chest, up to £150m of which will go into build to let within the next two years, according to corporate affairs director Kurt Mueller.
“Birmingham is in our top-five possible locations outside London. The council is considered to be very innovative and supportive, and we have a team there looking at options which will include acquisitions of existing stock as well as build to let,” says Mueller.
Grainger is also believed to be considering Bristol, Manchester, Edinburgh, and possibly towns on the south coast for PRS investment, with targets of 5% net yields.
“Shared initiatives are the way forward, we believe,” Mueller says, so the firm is looking at joint ventures and partnerships with landowners and public bodies.
As with other investors, Grainger emphasises that a West Midlands build-to-let offer will not emulate London specifications. “Typical renters in the capital may be bankers. That is not the market in the Midlands, so the bells and whistles will not be required,” says Mueller.
Rumours abound of still more investors considering the region.
Willmott Dixon – which in 2012 came close to a deal with Birmingham city council on a site the firm earmarked for build to let, only to be frustrated by a last-minute failure to agree terms – says it has long-term aims of coming to the city with build-to-let investment.
“You can expect announcements about PRS investment in Manchester and London this year. We are certainly looking at Birmingham in the longer term, but the decisive factor has been yields,” a Wilmott Dixon spokesman says.
“Birmingham will be considered when we look at other cities. We want to be there, as similarly we want to be in Leeds, Bristol, and elsewhere. We are not close to securing any sites,” he says.
Another expression of interest has come from mixed-use specialist Argent, which is behind Birmingham‘s Brindleyplace and now the non-residential Paradise Circus development.
In November 2013, its senior project director Rob Groves told EG: “We would definitely consider PRS in Birmingham. It is working well for us at King’s Cross and that could transfer.” The firm says it still supports the principle “but there is nothing we can talk about yet”.
Birmingham has, perhaps inevitably, dominated investors’ attention but analysts say the wider region, including Coventry, will benefit.
“A business case depends on yields and future rental demand. It will be Birmingham first and then a ripple out to the satellite locations,” says GVA’s Birks.
“But the critical factor is that London is arguably oversupplied, so PRS investors have to go to the regions. And the West Midlands looks one of the strongest right now,” he says.
Birmingham rental profile
• Lowest Birmingham rents*: Handsworth, Aston, Nechells, Saltley, Small Heath, Spark Hill, Smethwick, Birchfields, Lozells, Bordesley Green.
• Mid-range Birmingham rents*: Selly Oak, Ladywood, Edgbaston.
• Highest Birmingham rents*: Hockley, Jewellery Quarter, Digbeth, Balsall Heath.
• Average PRS rental growth (year to Q4 2013): 4.1%
• Average PRS capital growth (year to Q4 2013): 3.7%
• Gross yield range (full year 2013): 6.7% to 9.5%
