Lewis Carroll could have been talking about build-to-rent residential investors when his Mock Turtle asks Alice in Wonderland: “Will you, won’t you, will you, won’t you, will you join the dance?”
A year ago the private rented sector looked to be on the cusp of a breakthrough in the city. Estates Gazette broke the news that IM Properties’ residential arm, Spitfire, had £100m to spend on PRS homes in the West Midlands, Grainger named Birmingham as one of five regional investment targets, and Willmott Dixon saw Britain’s second city as a long-term target for its PRS portfolio.
Little has been heard from them since, except for a definite move away from PRS by IM.
Analysts say Birmingham has been looked at by Generate Land (which already has PRS sites in Manchester, Leeds and Liverpool), German company Patrizia and the investment venture jointly headed by Hermes Investment Management and Countrywide. Yet while all have considered dancing, none has so far taken to the floor.
On the other hand, two recent planning applications show PRS is clearly not a lost cause.
The city council is planning its own 92-home PRS scheme on St Vincent Street in the central core. Tahir Ali, cabinet member with responsibility for development, sends out a clear message when he says: “If the city council can do it, so can other housing developers.”
Regeneration specialist Nikal – already building the city centre Exchange Square mixed-use scheme, which includes 230 flats – now wants consent for another 1,000 units earmarked for PRS, in five towers with a gym and cafés. If consent is given, this would be one of the largest new-build PRS developments outside London. “We are expecting a shortfall of 80,000 homes in Birmingham over the coming years,” explains Nikal development director John Moffat.
So is Birmingham joining the dance? Or staying strictly on the sidelines?
“It’s difficult to say,” admits Adrian Willet, CBRE’s senior director in Birmingham. “There is clearly a huge appetite for rental stock and demographics indicate PRS should be a success, but it faces several challenges.
“Firstly, you can get up to £320 per sq ft in the open sales market, where a discounted PRS block would fetch much less. Secondly, there is the perennial problem of build cost inflation – it is difficult to estimate and although you can have a quantity surveyor price a scheme, it is hard to be sure unless they are tendered for.
“The third issue is rental levels and yields. They are slightly higher in Manchester, for example, and even a £20 difference can make or break the business case for PRS. Land owners in Birmingham might have to be more flexible.”
Willet is not alone in being restrained about the sector’s local prospects.
“There seems to be a real issue in finding a model that satisfies both management and funding criteria,” says Mark Birks, land and development director at GVA.
“None of the key funders or institutions have really got their heads around the risks of PRS in a regional context. The owner-occupier market does not offer, to the same extent, a safety net for PRS funders in regional towns and cities, as might be assumed in London – principally linked to the viability and confidence of these respective markets.”
Even office-to-residential conversion has not taken off on the scale some anticipated, despite being touted as a way to create PRS stock at reduced cost as there would be no affordable housing requirement and minimal additional consent. “With the permitted development rights deadline in May 2016 fast approaching, developers pursuing PRS on this basis are running out of time,” warns Birks.
One helping hand for PRS in Birmingham may be PRS Operations, a subsidiary of credit asset management firm Venn Partners. Its selection by the Department for Communities and Local Government to foster investor interest in the £3.5bn fund of government-backed loans includes a specific remit to encourage build-to-rent in the regions, not just South East England.
“Birmingham is definitely one of the locations where we expect PRS to succeed,” says Paul House, head of real estate at Venn. House will not be drawn on whether the city features in early expressions of interest in the fund, announced in December, but he expects regional investors as well as national and international players to be prominent.
Knight Frank – which is involved in various West Midlands’ residential prospects – also anticipates PRS interest growing thanks to the city “coming of age” on several fronts.
“HS2 is key, as is the redevelopment of New Street Station, the opening of John Lewis, the Snow Hill masterplan and incoming metro links, as well as inward investment from the likes of Deutsche Bank,” says Mark Evans, Knight Frank’s head of residential development in Birmingham.
Knight Frank’s figures for Q4 2014 make promising reading for PRS enthusiasts worried about Manchester being more attractive (see box). Even so, Birmingham’s yields have tightened from a year ago and may be too uncertain for many investors, says CBRE’s Willet.
He says the PRS in Birmingham will happen, but rising land costs – with owners benchmarking expectations against the strong owner-occupier market – means PRS homes may have to develop in secondary locations with lower costs in order to make schemes viable.
“Perhaps most important would be a big incentive – a central government subsidy or tax break for PRS in the regions,” says Willet. “Without that, well, who knows?”
PRS Index 2014
| Birmingham | Manchester | London zones 2-3 | |
|---|---|---|---|
| Average rental growth | 2.5% | 1.9% | 2.3% |
| Average capital growth | 4% | 3.9% | 11.4% |
| Average gross yields | 7.88% | 7.65% | 5.03% |
Source: Knight Frank
