Long Read  

Private rental sector could become new darling of institutional investors

Private rental sector could become new darling of institutional investors
(FT Montage/Fotoware)

There is a three-pronged crisis facing the fastest growing and arguably most important segment of the UK housing market, the private rental sector, which provides homes for 19 per cent of households.

First, there is falling affordability. Second, the energy performance of our ageing housing stock is unfit for net zero. And third, there is a landlord exodus reducing supply.

Price, quality and volume are all getting worse for residents, and yet the value of this part of the market is an estimated £1.4tn. By contrast, the FTSE 100 was worth £1.78tn at the end of September 2022.

Article continues after advert

Based on value alone, the private rental sector warrants the attention and funding of institutions.

Add to this the opportunity to provide solutions to growing environmental, social and governance problems, and the private rental sector quickly starts to look like the next darling of institutional investors struggling to find inflation-beating yields and stability in the stock market.

The problem of affordability

Buying a home in the UK is expensive. Average house prices are more than 10 times average household incomes. This problem is at its worst in high-demand areas such as London, which have always been expensive. 

Affordability issues have worsened in the context of post-Brexit, post-Covid, and mid-Ukraine turmoil. As is the case for the wider economy, house price inflation is being driven by shortages of supply.

Other parts of the economy stalled during the pandemic, but the housing market exploded. The temporary stamp duty reduction designed to combat the impacts of Covid on the housing market acted as a catalyst, but this was not the only cause of house price growth.

Demand was boosted by a glut of people wanting to upsize. Thanks to historically low interest rates and higher savings as a result of repeated lockdowns, many were also more able to afford to buy their own homes.

On the supply side, new housing was curtailed by planning backlogs from lockdown alongside labour and material shortages and inflationary pressures spiralling out of Brexit and Covid. Construction material prices rose by more than 20 per cent per year in recent years, according to the Construction Leadership Council. 

Buoyant demand combined with stagnant supply means an ever-growing shortage of housing in general and affordable, quality, energy-efficient homes in the places people want and need to live in particular. 

As the cost of buying a home grows, affordability in the rental market becomes more important. Demand keeps growing with demographic changes and the rise of ‘generation rent’, who cannot or do not want to purchase their own home.

The affordability problem is worst in big cities as life normalises, driving private rents higher and higher – in London, rents are up 17.8 per cent in a year. As a result, lower-income renters can now expect to pay up to 40 per cent of their income to live in an averagely-priced rental home.