Generation Rent: tenant woes widen role of ‘build-to-rent’ investors

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Life is rough for tenants. For the estimated 11mn people in England who rely on renting from private landlords, Thursday was particularly short of good news. 

An average of 25 tenants are chasing each available home, according to property website Rightmove. Listed landlords Grainger and Unite Group, which serves students, said they had pushed up annual rents 8 and 7 per cent respectively.

Conditions will remain tough for Generation Rent, typically younger Britons priced out of buying their own homes. But the supply crunch creates a long-term opportunity for investors in the nascent “build-to-rent” sector.

The UK’s rental sector is still dominated by small private landlords. Properties owned by large outfits such as Grainger account for just 2 per cent of all privately rented stock.

Smaller landlords are bailing out. They cannot all push through big enough rent increases to service buy-to-let mortgages. The number of UK properties available to rent is at a 14-year low.

A recent survey suggested private landlords are twice as likely to sell as to buy, even though mortgage costs are coming down. The threat of legislation that would effectively end fixed-term tenancies in England also puts them off.

That should widen the niche of commercial build-to-rent developers such as insurer Legal & General and private capital group Blackstone. They can negotiate cheap finance. Grainger has fixed the cost of its debt at 3.5 per cent for the next five years, it said on Thursday.

Falling valuations have deterred build-to-rent investors so far this year. Construction costs have been another worry. Transactions in the first half of the year dropped to £1.9bn, down from £2.5bn a year earlier, according to Cushman & Wakefield data.

Strong wage growth should allow landlords to keep raising rents, however. Typically, a Grainger tenant spends 28 per cent of their income on rent — meeting housing charity Shelter’s 30 per cent “affordability rule”. Hamptons expects rents to rise 25 per cent over the next four years.

Build-to-rent is no panacea for Britain’s chronic housing shortage. This is rooted in a dysfunctional planning system. Some campaigners will deplore the fact that home ownership is unaffordable for many. But commercial build-to-rent investors could at least supply roofs over the heads of a proportion of Generation Rent.