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November 29, 2016

The strength of momentum behind UK residential investment continues to improve, despite good reasons to expect otherwise. The headwinds are well-known; softening market performance, post-EU referendum uncertainty and changes to Stamp Duty that could have undermined growth of the asset class.

“Investors and developers continue to recognise the opportunity in the UK’s private rented communities (PRC) market – JLL’s term for Build to Rent which reflects the attributes and values of this stabilised asset class – despite the result of Brexit, we are seeing investors looking for the security in residential rental income in both London and the regional cities.” says Simon Scott, JLL’s Head of Investment, UK Residential Capital Markets.

According to JLL’s latest residential research report, Into The Mainstream, London remains the country’s dominant market for PRCs, with the British Property Federation suggesting the number of purpose-built rental units under construction or complete in the capital is now nearing more than 30,000.

The bulk of London’s investment and development activity is in suburban locations, particularly alongside train or tube stations and city centre regeneration schemes in the commuter belt.
“The greatest opportunity for the development of large scale Private Rented Communities (PRCs) is undoubtedly in the major metropolitan centres, as evidenced by the activity around London and Manchester in particular,” continues Scott. “This stems from the deeper letting pools and the ability to deliver scale.”

“Having said that, the opportunity to develop purpose-built rental stock, in an age where renting is no longer seen as a tenure of last resort, should provide opportunity for viable delivery in other less mainstream locations.”

It is a sentiment JLL’s Head of Residential Research, Adam Challis, agrees with.

“Residential investors continue to seek an improved yield position, and this is more readily available beyond the markets and capital values of southern England,” Challis says.

Whether in the capital, or in a regional city, demand is building in the UK for PRC product. Recent reports indicate there is more than £30 billion of pent-up demand in the sector, with some commentators suggesting that this number could be considerably higher.

“The disconnect is the limited new supply coming to the market and the lack of existing product,” Scott says. “As a result, we expect to see development and investment activity growing substantially over the short to medium term.”

New capital is competing effectively against incumbent UK residential investors, driving sharp pricing in markets such as London and Manchester. However, established investors retain an advantage – they are often more nimble and can target opportunities in secondary and tertiary cities. This has resulted in several large-scale residential deals in new markets.

“This investment into new markets is vital for further expansion of the asset class, providing broader choice and diversification for the next wave of investors in stabilised portfolios,” Scott says. “It will also demonstrate the big opportunity for new private sector investment to support regeneration activities in many UK communities.”

Scott is also buoyant about the PRC sector’s potential over the medium term.

“The real attraction of residential investment is the variety of product that can be created to suit all risk/reward appetites,” he says. “There is a structural shortage of residential accommodation in the market, and ever-growing demand pressures, so the positives significantly outweigh any perceived risks.”

“The Government is increasingly supportive for a significant increase in provision of supply, so our expectation is that the sector is likely to grow, with the pent-up demand for the right product offering significant opportunity for investors and developers.”
Challis says policy support from city politicians and planning authorities for PRCs is growing, and will aid development of new stock.

“This, perhaps more than anything else, is the most important ingredient needed for the sector to flourish,” Challis says. “It will innovate, it will expand – it will also make mistakes to learn from – but unwavering support from policy can ensure that this new sector not only expands the quantity of homes build in the UK, it drives a step change in quality along the way.”

Watch the video below to hear Adam Challis further discuss the state of the Private Rented Sector, including its growth in the last few years and why it’s helping solve London’s housing supply challenge.

Simon Scott
JLL’s Head of Investment, UK Residential Capital Markets

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