Getting it right with private rent: A market perspective

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1 Getting it right with private rent: A market perspective Jacqui Daly, Director Savills Research savills.com

2 Contents 1 Why now? 2 The drivers from investors perspective 3 Opportunities for RPs and sources of funding 4 Key challenges & risks 5 Preparing your business for private rent 6

3 Why Now? 1. Economics Market Conditions 3. Political Support 4. Returns and Opportunity

Low Supply Even at the peak of the previous cycle and with an abundance of cheap credit, London s developers struggled to build

4 Economics 101 Demand > Supply High Demand Shift to rent continues Increase in number of discretionary tenants. The Generation Rent age group (25-34) is the fastest growing population subset in London. Low Supply Even at the peak of the previous cycle and with an abundance of cheap credit, London s developers struggled to build enough homes. Savills Research forecasts that future supply will not (never) meet the minimum targets. Source: CML, CLG, Savills Source: Oxford Economics, Census, London AMR, Savills

London +65% Birmingham +75% Bristol +76% Manchester +95% The average deposit for a first time buyer in the UK is currently 26,000.

5 Political support - The naked truth In the past 10 years levels of home ownership amongst the under 35s have fallen by 33%. In the past 10 years the number of households in the private rented sector have risen from 3.0m to 4.8m. London +65% Birmingham +75% Bristol +76% Manchester +95% The average deposit for a first time buyer in the UK is currently 26,000. In London it is 60,000. Despite the fact that interest rates are low, the cost of capital repayments mean that it is still cheaper to rent than buy for most prospective first time buyers.

Market conditions development constrained 70,000 UK Private Housing Completions England Private Housing Completions UK Housing transactions (RHS) 700 Housing Completions and Approvals 60,000 50,000

6 Market conditions development constrained 70,000 UK Private Housing Completions England Private Housing Completions UK Housing transactions (RHS) 700 Housing Completions and Approvals 60,000 50,000 40,000 30,000 20,000 10,000 0 Q4 12 Q1 12 Q2 11 Q3 10 Q4 09 Q1 09 Q2 08 Q3 07 Q4 06 Q1 06 Q2 05 Q3 04 Q4 03 Q1 03 Q2 02 Q3 01 Q4 00 Q ( 000s) Housing Transactions Source: DCLG

7 Returns: relative to other assets 14.0 Offices Retail London Residential Equities Gilts Annualised total retu urns (% pa) Volatility Source: Savills; IPD

8 A growing sector worth 893 billion Value of UK Housing billion 6,000 5,000 4,000 3,000 2,000 1, Owner Occupied Unmortgaged Owner Occupied Mortgaged Private Rented Sector Social Rented Sector % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Distribution of Value Owner Ower occupied occupied without a with a mortgage mortgage Private Rented Social Rented Other Source: Savills

9 Dominated by younger households Proportion of Hou useholds Owner occupied Private Renters Social Renters 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Age Under > % of PRS 50% 22% 20% 8% Owner occupied Private renters Under 35-33% 86% % 132% % 118% % 45% -75% -50% -25% 0% 25% 50% 75% 100% 125% Change % Source: English Housing Survey

76% Birmingham 20% 75% Leeds 19% 64% Area % PRS households Growth in PRS households

10 With a distinctly urban feel Source: Savills Research, Census Area % PRS households Growth in PRS households Manchester 30% 95% Liverpool 25% 79% Bristol 25% 76% Birmingham 20% 75% Leeds 19% 64% Area % PRS households Growth in PRS households Brighton 31% 38% Oxford 30% 35% Cambridge 28% 33% Reading 27% 67% Southampton 26% 53%

11 Market Prospects: sustainable growth Current Growth in Private Renting 260,000 households per annum ,500 equity loans 26,500 mortgage guarantees 19,00 equity loans 37,000 mortgage guarantees 25,500 equity loans 47,500 mortgage guarantees 228,000 additional PRS households 204,000 additional PRS households 187,000 additional PRS households

12 Opportunities for RPs - build to let Supply of land Planning trade offs Tax incentives

13 Funding sources for RPS Source: Savills

14 Key challenges & risks Investment market pricing Asset management business Track performance Management benchmarks Why Churn? Source: IPD, Savills

15 Key challenges & risks Why Churn? Poor performing assets (high void rate / falling rents) Capital expenditure requirement Strong performance (capitalisation of profit for reinvestment in new stock) Aging portfolio Asset management opportunities increase / decrease density redevelopment / refurbishment break up potential to vacant possession values Source: IPD, Savills

Investment strategy Scale, product and local market research Governance, accountabilities and structure Ring fenced from other

16 Preparing your business for private rent Why do private rent? Identify objectives for organisation and rank drivers The case for PRS Nationally, regionally, locally, within footprint Investment strategy Scale, product and local market research Governance, accountabilities and structure Ring fenced from other activities -SPV Operations and service offer Internal v external management, branding Funding, cashflowand assumptions Different to social housing Sensitivities and risk management Source: IPD, Savills

Time to Invest in PRS? The Rise of the UK Private Rented Sector

Time to Invest in PRS? The Rise of the UK Private Rented Sector 0 Household Creation Population Growth (y/y %) House price to earnings ratio UK RESIDENTIAL: SUPPLY AND DEMAND The UK Residential Market