Gavin Paton
Readers of a certain age will recall the “Rising Damp” sitcom from the 1970s with the wonderful Leonard Rossiter playing the hapless live-in landlord, Rigsby. Part of its popularity was undoubtedly because many of the themes had a firm footing in reality: grubby, substandard flats with unscrupulous landlords charging rents that were far too high. While some “Rigsby” landlords may still exist today – are their days numbered?
A new age in private rented accommodation is already upon us with the number of institutional private rented sector (PRS) schemes rising sharply. There is increasing demand for private rented accommodation at a time when more traditional models are struggling to deliver the required volume of homes – hence the support of both the UK and Scottish Governments for PRS schemes.
The make-up of the housing sector has changed significantly over the last few years; with the proportion of private rented properties growing relative to owner occupied and social rented properties. More than 10 million people (around 4 million households) in the UK live in private rented accommodation. It is believed that the size and importance of the PRS in relative terms will continue to increase over the coming years.
It is this increasing demand for private rented accommodation and the prospect of favourable long-term returns that is attracting institutional investors. Prior to the recession rental growth matched growth in earnings and was ahead of inflation. Post recession it is believed that these trends will continue.
Clearly an investment in volume rented residential accommodation is significantly different from investment in rented commercial property. A large number of short-term tenants compared with a single (or a few) long term tenants is a very different proposition. If a single high value tenant of a commercial property defaults all of the income stream can be lost and the pool of substitute tenants may be limited. However, if one tenant in a residential property defaults or moves on the income stream is only slightly reduced and a there is likely to be fairly ready supply of substitute tenants.
The structure of institutional PRS deals vary and legal support is generally required on planning, property, funding, construction, ongoing operation/maintenance and profit sharing aspects. Forward funding of the development by the institutional investor can be an attractive option for the developer and the investor. Where the site and the design allows phased completion, handover and occupation that can help to reduce the level of interest being rolled up and reduce the exposure of the developer to risk (including construction risk) on a phased basis.
Developer clients Dandara recently concluded a deal with La Salle Investment Management for the development of a 292 unit PRS scheme in Aberdeen. The first of that scale in Scotland. The development is a mix of apartments and townhouses at Forbes Place on the Stoneywood estate in Aberdeen and is aimed at the medium-term occupancy rental market. Forbes Place was designed specifically for the PRS sector and this deal is solid evidence of the increasing appetite of institutional investors for purpose built rental developments in major business locations such as Aberdeen, Edinburgh and Glasgow.
Market demand will eventually dictate what the general body of institutional investors determine to be the minimum viable size for such schemes. It is also unclear at what level the institutional appetite for such investments will have been satisfied.
It seems very likely that investment in PRS schemes by institutional investors will have an important role to play in setting the standard for housing stock in the private rented sector - perhaps pushing up quality and consistency overall. Will institutional PRS schemes have Rigsby shaking in his slippers and a re-housed Miss Jones purring with contentment on her chaise longue – or will they simply create an even starker contrast between the top and bottom ends of the private rented sector?
Gavin Paton is a partner of Burness Paull
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