The region’s private rented residential sector continues to grow but the risk of oversupply remains “the elephant in the room”, according to industry experts speaking at Place North West‘s PRS Conference.
Nearly 200 people attended the event at Manchester’s Museum of Science & Industry, sponsored by Curtins, Indigo Planning, Lambert Smith Hampton, and Winckworth Sherwood.
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Speakers at the event included Jo McCafferty, director at Levitt Bernstein; Duncan Sutherland, director of regeneration at Sigma Capital; Chris Findley, assistant director of planning and transportation at Salford City Council; Shaun Prime, chief operating officer of Go Native; Ed Ellerington, director of PRS at Grainger; Doug Hann, director at Indigo Planning; James Duncan, partner at Winckworth Sherwood; Adam Higgins, co-founder of Capital & Centric; and Ian Scott, head of northern PRS at Lambert Smith Hampton.
Scott kicked off the proceedings with an overview of the PRS market in the region, with a mixed outlook for the sector in cities and town centres.
- Private rented schemes are attracting net rental yields of around 4%-4.5%; Scott cited Outwood Wharf with a 4% yield and Grainger’s Gore Street, being built by Sir Robert McAlpine, with a yield of 4.75%
- Jobs growth and urbanisation are continuing to drive demand for rented apartments and homes in Manchester, but “the jury is out” whether the same demand can be replicated in Liverpool, and town centres such as Bury
- There is a growing difference between institutional PRS schemes and those marketed to overseas buyers, the latter of whichwhich can have net rental yields around 1%-2% in both Manchester and Liverpool
- Scott warned “the elephant in the room” was supply, as more than 7,000 private rented apartments are now under construction in Manchester city centre. He predicted rental growth would slow as more of these apartments are delivered
- He added there was “a lack of data” in the market to show the full state of play, and added that PRS investors should make letting “their first priority” before thinking about operational costs
His presentation was followed by Duncan Sutherland of Sigma Capital, who outlined Sigma’s approach to the sector and the growth of privately-rented homes in suburban locations.
- He described Sigma’s model as “very simple, very low risk” that can “deliver a lot of houses very quickly” with a focus on privately-rented and managed family homes and houses
- The company began looking at the market in 2007 but found it difficult to get initial backing as investors “weren’t interested” in the development risk
- However, since Gatehouse Bank backed Sigma with an initial investment, the company has spent more than £250m on PRS across the country, and Sutherland said there was “a real appetite from long term investors” to back Sigma’s model
- Sigma is now targeting around £1bn in assets, having delivered “around half that” since 2007
- Tenants stay three years on average in each property and Sutherland added having this certainty of tenancy was all about part of the “long-term” income streams Sigma is targeting
- Pension funds are now looking to invest further in Sigma’s model, which has a pipeline of around 5,000 homes across the country, with sites typically providing between 50 and 100 units
Both Sutherland and Scott then joined a panel including James Duncan, partner at Winckworth Sherwood; Ed Ellerington of Grainger; and Salford Council’s Chris Findley.
- Findley began by arguing Salford Council was “more interested in PRS models that includes quality” in both construction and building management. He added that the council had not yet been fully assured on the quality of building management and said local authorities “are having to look more carefully” and “ask a lot more questions” about quality of materials following last year’s Grenfell Tower fire
- Scott said the saturation point for private rented development in the centre of Manchester was hard to pinpoint, but he said his “gut feeling” would be between 10,500 and 15,000 units. He noted fund managers in London had already begun to raise the issue of oversupply
- However, Ellerington argued the danger of oversupply was lessened by the variety of the private rented sector offering in the city centre. “If we’re all building exactly the same product in city centre blocks, we’d have a problem,” he said, adding that developers should be targeting “a diverse range” of build-to-rent property to maximise returns
- Duncan said investors were becoming increasingly keen to hear about occupier satisfaction rates, something that was “never even considered” in previous years, as they are increasingly seeing private rented developments as a long-term investment opportunity
- Ellerington added there was still “a lot of noise” from overseas investors, but working with institutional investors was still “a far more attractive route” for getting PRS developments off the ground
The discussion moved on to whether private rented developments should be given their own use class under planning regulations, with the panel split on whether it was the best way forward.
- Sutherland said one of the issues was Sigma had found itself in direct competition with housebuilders for sites, and in some cases “couldn’t compete” due to the longer-term return on investment from PRS
- Ellerington argued against a separate use class for PRS, stating: “You want to keep an open playing field but there’s a benefit to not having a use class, and the complications that come with it”
- Duncan said the sector was “not making it easy for valuations” with many still “sticking their finger in the air” to determine rents and project values. However, he added: “Investors wouldn’t normally touch anything like that so it shows how keen they are to back the sector in the UK”
- A question from the floor asked whether rental growth would continue, but Scott said he was “relatively pessimistic” that it would continue
- Ellerington agreed, stating that growth of between 2% and 4% could not be expected in major cities once the current pipeline of units was delivered, but rental growth was more likely at regional centres, including The Rock in Bury
The panel finished with another question from the audience, which asked whether politicians really understood how to tackle the private rented sector. Sutherland concluded that all parties, from developers to contractors to architects, needed to engage further with both planners and politicians to help them understand the benefits, opportunities, and variety the sector had to offer.
Realities of renting
After a short break, the audience reconvened to hear from Shaun Prime, chief operating officer of PRS operator Go Native.
- Prime said his company had undertaken focus groups to outline “the realities of renting”, with most people not wanting to deal with letting agents; looking for flexible tenancies; and the ability to personalise their rented homes
- He said renters also wanted variety, and argued including different unit types in PRS blocks was important and often led to higher yields
- Amenity space should be used “as a selling tool” and should be seen as a vital component of private rented developments
- Go Native, which is working with Capital & Centric and Henry Boot Developments on Kampus in Manchester, is using models including all-inclusive billing, no fixed contracts, no fees, and phased deposits over two to three months
- He concluded that design and apartment mix should be the priority for any private rented developer or operator at the early planning stages
Design for PRS
A panel discussion followed with Prime joining Jo McCafferty, Adam Higgins, and Doug Hann to discuss how design for PRS had evolved and the opportunities ahead.
- McCafferty said that designers have to be “realistic” when looking at PRS projects owing to the higher turnover of tenancy than in standard housing. She argued “the small things matter” and that building organisation and management needs to be carefully scrutinised as a result
- Higgins said cities including Manchester were “waking up to the fact that not everyone needs a car”, arguing that the need for car parking space should not always be imposed by planning authorities. He said there was scope for planning authorities to look again at policies including for key worker accommodation and restrictions on one-bed properties
- He cited the example of Manchester where there has been “massive demand” for one-beds but planning policy stipulates developments can only be made up of a maximum of 33% one-bedroom apartments
- Prime said there was an onus on PRS operators, designers and contractors to build “high-spec” as it makes operating and maintaining properties much easier. He said: “As a long-term manager, in the development stage we want to build the best as you can, but we find those who are developing to flip properties won’t put the time and money into it”
- Hann said there was a concern that local authorities, particularly around cities, were focussing on high-rise PRS blocks to hit their housing targets rather than looking at a more diverse range of rented properties
- He also agreed with points raised by the first panel that there was a “lack of understanding” from some local authorities on how PRS models work, and argued planners should be “proactively allocating sites for build to rent” so developers would not have to price themselves against other operators in the market
Moving to modular?
The panel then discussed the use of modular technology in PRS, with a mixed reaction:
- McCafferty said using modular technology on mixed-use projects can lead to complications and argued: “I haven’t seen that much evidence of the quality that I would want to put my name to”
- She added: “Retention of architects throughout the project is important; without it, it can leave contracting teams trying to deliver a project from drawings that aren’t complete, or someone else delivering who doesn’t fully understand why the building was put together”
- Higgins said Capital & Centric was using bathroom pods on its Kampus development, and although it “doesn’t save a single penny”, he said it improved the quality of the fit out. “We’ve looked at modular housing extensively and there’s definitely programme benefits, but it doesn’t necessarily deliver the quality,” he added
- The panel all agreed that managing and delivering high-rise PRS is proving to be a challenge; Prime said building tall makes maintaining apartments and managing tenants much more difficult
- Higgins said that cities should be proactive and allocate sites for lower-rise PRS projects. “If we think a 12-storey scheme is appropriate, we’re always up against someone who wants to put a 30 storey-plus tower on a site. Height isn’t always the answer,” he concluded
The slides from the presentations are available on our SlideShare page, using the below links:
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