Investors continue to enjoy robust yields from the private rental sector, which is currently home to more than 4.5 million households. And despite the Prime Minister’s vow to turn ‘generation rent’ into ‘generation buy’, the PRS will remain ripe for investment in 2021 and beyond.
November’s five-year high in the year-on-year growth of house prices heralded significant challenges in affordability, with the stamp duty holiday looming on March 31. Stricter underwriting and the financial casualties of Covid-19 could therefore leave many people, particularly first-time buyers and those from lower-income backgrounds, unable to access the housing ladder in 2021.
Furthermore, investors should recognise that, for many tenants, renting is not a financial decision, but a lifestyle choice. Indeed, with more than a quarter of people who rent doing so ‘because it suits their lifestyle’, investors will improve returns by tailoring offerings to those who favour flexibility.
From five-year terms including license to decorate, to shorter subscription-style leases with utilities pre-arranged, investors should prepare for the PRS to become a more diversified ecosystem.
In with the old
While the ongoing vitality of rental is cause for optimism, an important caveat is the continued pressure this places on housing supply. Knight Frank predicts that another 560,000 households will have entered the UK rental market by 2023, whereas there are fewer than 111,000 new Build to Rent (BTR) units currently in the pipeline. The gulf is vast.
Rather than trying to play catchup with BTR, therefore, investors should also recognise that existing stock can play a crucial role in meeting demand. But how to identify the right investment opportunities in a market which is becoming more saturated and more diverse than ever?
AI technology has proven to be a valuable tool, using algorithms tailored to specific metrics to identify best-in-class opportunities at pace and scale. And besides improving efficiency, this data-driven approach helps investors assemble portfolios which accurately reflect their values and priorities. This feature of the AI approach will take on increasing importance as the market continues to evolve.
Tech tops priorities
Investments which embed technology within properties will likely deliver the strongest returns in 2021. Indeed, this is nothing new, with connectivity solutions such as superfast broadband essential for meeting tenants’ expectations even before the pandemic prompted a widespread shift towards working from home.
But PropTech’s potential to enhance yields goes beyond rapid, reliable connectivity. By ‘smartening up’ their offerings, investors can provide a more attractive lifestyle for tenants. Smart home maintenance systems, for example, can monitor household utilities in real time, meaning issues are identified immediately rather than on the next monthly maintenance visit.
In addition, AI-driven household management platforms can leverage Internet of Things technology to track room occupancy and operate central heating systems accordingly, minimising energy wastage on powering underused spaces.
With sustainability rightly becoming a higher priority for tenants, energy-saving offerings will deliver better retention rates for both environmental and economic reasons.
Renters are also re-evaluating the premium placed on city-centre locations. Last October, average rents in the UK countryside were 5.5% higher than in the same month in 2019, corresponding closely with a 5.3% year-on-year decline in average city rents. While demand for rental remains strong, it is spreading out from urban centres.
With many of us advised to work from home if we can during the pandemic, the prospect of no return to the offices of old has encouraged people to range more widely in their house-hunting efforts. Centrifugal force applied by Covid-19 is liberating city-dwellers from their attachment to central real estate, so investors should be ready to embrace burgeoning demand in the regions in 2021.
UK property provides plenty of food for thought for investors as they contemplate strategies for 2021 and beyond. Demand for rental will remain healthy, and the PRS promises to cope best with flourishing demand.
Moreover, the evolving market will see tech-savvy investors build resilience into their portfolios, while the balance – though not the importance – of location will shift. Agile investors who embrace all these changes stand the best chance of achieving pleasing yields over the next year.
*Elisabeth Kohlbach is CEO and co-founder of Skwire