UK Cities Investor Guide 2015: Building up the PRS

The private rented sector is starting to look like a healthier option for investors. New data from Knight Frank shows promising yields across the lettings sector in the likes of Manchester, Leeds, Glasgow, Bristol and Birmingham, where purchase prices remain relatively modest. However, the complicated challenge is to find a template suitable for different local markets and attract investors’ attention away from other residential opportunities. While regional city yields of 6% to more than 8% compared with central London’s 4.2% to 5% suggest a strong case for investment – especially as capital appreciation in the regions is also forecast to outstrip London in 2015 and beyond – investors are still trying to assess what product is best suited to what city. “There’s increasing institutional interest beyond London, because the capital is expensive and because institutions instinctively diversify,” explains Gordon Isgrove, development director at GVA in Bristol, working with Sovereign housing association on developing PRS. “Building from scratch is usually preferable in terms of end product but not always possible in less mature regional [PRS] markets.” His three schemes in Bristol show the potential variety of the sector – one is new build coming out of the ground, one is a conversion of an old factory, and the third is part of a mainstream housing scheme delayed by the downturn. Isgrove’s instinct is that while each PRS scheme is site-specific, the trend will be to have them in what he calls “professional locations” in or near regional city centres. Springside, Grosvenor’s scheme containing PRS at Fountainbridge on the western periphery of Edinburgh city centre, is a case in point. “The next phases will deliver up to 400 units built for rental. The demand in the first phase for high quality rental provided by a reputable landlord underlines the need for more accommodation of this kind,” says Grosvenor’s project director, Robin Blacklock. But while the product is defined as a mix of new build and conversions, and the location is defined as urban centres, a final element is harder to pinpoint – who is doing the building? Early in the current government’s Build To Rent ambitions, much was made of the prospect of volume builders getting involved in the regions. It hasn’t turned out that way. Regional rental yields | Create infographics When the Department for Communities & Local Government announced the Build To Rent fund’s first phase in April 2013, some 43 firms were on the shortlist, many of them large-scale builders. This dropped to just 18 in total when phase two was announced in March 2014. Those who left the field included Taylor Wimpey, Persimmon and Countryside. Analysts said the decline was down, in part, to the fact that better returns were on offer from building for a fast-recovering owner-occupation market for which there was cheap private finance available – fuelled by the Help To Buy scheme – without the need to borrow with the strings that were attached to the government Build To Rent loans. “For PRS to work it often needs sites to have a discount and that can be slower to achieve. House builders are more tempted by conventional sales,” says GVA’s Isgrove. However, while niche firms now look set to dominate PRS in the regions, two house builders have remained loyal. Bovis Homes is building 510 units across sites in the Midlands and southern England while Crest Nicholson has constructed 102 homes at Centenary Quay on the old Vosper Thorneycroft site in Southampton. Crest has been particularly innovative, selling units to A2Dominion Group to handle lettings and management – a “build and sell on” solution that gives yet another variation to the PRS regional business model. Trying to make sense of this bundle of varied approaches is the newly established PRS Operations. This is a subsidiary of credit asset management firm Venn Partners, chosen by DCLG to help unlock £3.5bn in government-backed loans for the sector (see box, above). “We’re anticipating quite different site and city specific interest but obviously there will be some standard criteria whether a PRS proposal is for London or for the regions,” says Richard Green, a partner at Venn working at PRS Operations. These are likely to revolve around four principles, he says: the choice of a significant and strong employment location; a site that will attract capital; an appropriate build quality to improve upon the current variable “buy to let” offer; and management capability post-build. Venn’s team is not giving details of the approaches it has had since the funding was announced in December, except that “it’s been good and there will be more engagement in the near future”, according to Paul House, Venn’s head of real estate. But his belief is that long-term prospects for regional PRS will rely heavily on “brand” and quality, and that there will be no “one size fits all” approach. “Specifications will vary. Perhaps one scheme will have a concierge taking in packages and nothing more, while another may have club rooms and extra facilities. Different operators will want to create their owns brands and expectations,” says House. “Most of the schemes will be new build but it’s not impossible that an office-to-resi conversion, for example, might be acceptable, but something like student accommodation would not,” he says. So PRS remains, for the moment at least, a slippery product to define. Much clearer, however, is that yields and market dynamics (not to mention the government’s desire not to be branded London-centric) suggest the regions are where it will blossom in 2015. How PRS Operations will work Initially, up to £3.5bn in government-backed loans will be made available to landlords looking to invest at least £10m in new homes available for private rent. The investor will be able to access a maximum 80% loan-to-value loan, which may exist for up to 30 years. Student housing, specialist supported housing/care homes and serviced housing projects are ineligible for funding under the scheme. Housing minister Brandon Lewis says the total pot could rise to £6.5bn in future.