The maturing market, changing occupier requirements, and the challenges facing institutional investors in the private rented sector were all topics discussed at Place North West’s PRS in 2017 breakfast event.
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More than 130 delegates attended the Manchester city centre event, sponsored by Winckworth Sherwood, Premier Guarantee and Curtins. The panel featured James Sidlow, project director at Allied London; Adam Hall, managing director at Falconer Chester Hall; Alex Greaves, head of residential investment at M&G Real Estate; Steve Modric, strategy manager at the Homes & Communities Agency; and James Duncan, partner at Winckworth Sherwood.
The private rented sector is maturing at a rapid rate as the market continues to grow and access to finance becomes easier, according to the panel.
Winckworth Sherwood’s Duncan said the market was moving from “the hype stage to the reality stage’” as more schemes complete and investment models became established. “As that market grows there will be more funding available on a more regularised basis,” he said.
The panel agreed that more time was needed for PRS to widen its appeal from the main target audience of 25-35 year olds, to other demographics including families and empty nesters.
The HCA’s Modric told the audience that only 15% of the residential market is currently made of institutional PRS homes, saying: “The big advantage of professional PRS is that it offers stability and better quality homes. That’s why Government ministers want to see the sector grow and broaden out from just focusing on young professionals.”
Funding and investment
M&G’s Greaves explained how firm had made its first investment in the Manchester PRS market in September, with a £27.6m deal to forward fund the development of 135 homes at Port Street by Mulbury.
Greaves said the primary concern of institutional investors was net income, and that the risk adjustable returns and predictable cashflow offered by PRS were appealing. He added that the demographics of a city, its wage growth, affordability, and supply and demand of homes were all factors when choosing locations suitable for investment.
The deal with Mulbury arrived at an opportune moment for M&G. “We got into contract straight after Brexit, which gave us an opportunity to make sure that the pricing worked for us,” he explained, adding that the scheme had already risen in value.
Greaves said M&G was focusing on the Manchester, Leeds and Birmingham markets and had “plenty of capital to put in.”
“We’d love to carry on investing here,” he said. “We have to find the right scheme and we have to get the right returns.”
Design and community
Sidlow told the audience that Allied London’s St John’s development at the former ITV Granada Studios in Manchester aimed to create a unique community feel.
Across St John’s and the proposed Trinity Islands project nearby, Allied is set to build 2,400 homes, of which around 1,300 will be PRS properties, made up of 600 in two high-rise blocks at St John’s and 700 at Trinity Islands. The homes will sit alongside 250,000 sq ft of retail and leisure facilities and 500,000 sq ft of commercial space, with tenants offered “privileged access” to neighbourhood amenities.
“There are a lot of PRS developments which are standalone, only offering small commercial units on the ground floor,” he said. “St John’s is about the wider neighbourhood and community.”
Sidlow explained that developing PRS blocks as part of a wider area masterplan avoided having to “obsess about unviable and costly amenities in PRS buildings”, leaving the focus on creating more cost-efficient designs.
Hall provided an update on PRS schemes across Liverpool, including Vista’s three-tower Baltic Village development, which is due for completion in the next few months, and the 34-storey Princes Reach project for Moda Living at Princes Dock where work is about to get underway.
He said that Falconer Chester Hall’s strong background in the hospitality sector had been key in designing successful PRS schemes in the city, as tenants expect “hotel-like quality”.
Hall said efficient design was crucial in ensuring schemes were viable and delivered as high a return as possible to developers and investors, especially in the Liverpool market which was not as strong as in Manchester. He maintained that projects need to include at least 250 homes, so that the scale would ensure allow for loss of rentable space for use as resident amenities.
The panel felt the core market for tenants was still 25-35 year olds, but that PRS could appeal to new demographics as the market matured.
High wage growth for 25-35 year olds was key for Greaves. He said: “We open the doors to whoever would like to live in one of our properties, but the reality is the majority of people in that demographic are renters. In 10 years’ time we’ll have a much bigger fund, and I’ll be looking at the needs of the 35-45 year olds. But you have to give the market chance to mature.”
Sidlow told the audience that while St John’s would cater for a variety of occupiers, he expected around 60-70% of PRS tenants to be 25-40 year olds.
However, Modric pointed out families occupy 40% of rental homes in the UK, so offer a large pool of potential occupiers for the PRS market, if designs are delivered which accommodate their needs.
Design and unit size are key in futureproofing schemes according to Hall, allowing current young professionals to stay in PRS for longer.
He said. “We’re trying to create an environment where a tenant might move laterally or vertically within the building. That keeps people in place and creates that sense of community with somebody living in a building rather than one unit.”
Hall told the audience that while Liverpool didn’t have the commercial draw of Manchester, the PRS market appealed to students and empty nesters attracted by its cultural draw.
Duncan said the ability of a vibrant PRS sector to encourage students to remain in cities after graduating addressed a significant planning challenge.
Finding the right operators
Finding the right operators for schemes remains a problem.
Duncan said the UK was “a long way off” a standard model for operators, adding: “There is still a dearth of good operators who know the relevant markets. Institutional investors are only interested in the net income, and driving that net income is the operator.”
Sidlow said that Allied London was in talks with an American firm with “an unrivalled track record in the hospitality sector” to operate the PRS units at St John’s.
“They get what Allied London are about, and they are bringing some exciting ideas to the table, in particular their lettings strategy and digital platform, how they are going to operate the building, and how they are going to grow revenue and rent,” he said.
Greaves outlined how M&G had appointed Leeds-based LIV Group to manage its next phase of schemes following a global search.
“The difference between the proposals were extraordinary,” said Greaves. “Innovation, branding, technology, media, digital enhancement, data collection and data mining are all things that we looked for.”
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