Will the Private Rented Sector Initiative PRSI and Build to Let Ever Take Off

If you asked a group of private landlords what they understood about the term “private rented sector initiative” (or PRSI) you would get a blank look from most. And yet, this could be one of the biggest threats that the UK’s private landlords currently faces.

In summary, the PRSI is about getting city investors such as pension funds to invest in large scale developments which will be entirely rented out to private tenants. It has sometimes been dubbed “build to let” to distinguish it from “buy to let.”

The attraction for investors at this time is obvious. Not much new housing is being built, it’s a risky time for investments generally and there has always been an investor appetite for low risk and high and reliable income over a longer term horizon.

In the past, though, residential property investment has offered investors capital growth rather than income – which wasn’t attractive for institutional investors like pension funds who need to try to match investment returns against liabilities such as pension payments, and hence prefer a steady and reliable income stream. This meant that most fund managers steered clear and if they had any money allocated for real estate, they stuck to what they knew about – commercial property.

Also, big investors always struggled to get hold of residential portfolios of a size that would make investing worth their while. And even if they could get the scale, the labour intensive nature of assured shorthold tenancies made management too much like hard work compared with longer commercial property leases.

But in the current market, it’s thought that sufficiently high net yields could just possibly be achieved from rental streams without too much reliance on capital growth.

The attractions for the government are clear. House builders are not building enough private homes and housing associations are not developing enough social housing. So, the PRSI, by using “big city money” could potentially restart stalled housing schemes – thus increasing the number of homes for rent and relieving pressure on the housing market.

Rugg Review

The HCA’s initiative to kick off build to let actually formed one of the previous government’s set of responses to the Rugg Review of the private rented sector.  But Dr Rugg’s report found that the small scale private landlords did a better job than bigger company landlords at meeting tenant’s needs. This could be because the typical private landlords (overwhelmingly individuals or couples) don’t charge for the time they spent on their lettings (whereas a company employee would.)

Of the big institutions, ING, Terrace Hill, Aegon, Aviva and a consortium led by Bespoke Property Group all declared some interest in taking schemes forward. Grainger is involved too. Legal & General, interested initially, later decided against investing for now.

And who will manage the rentals? Registered social landlords such as Notting Hill Housing Group already manage their own social housing stock and landlords familiar with private leasing schemes may be aware of Orchard & Shipman, which works for landlords and some local authorities – matching homes with people on council waiting lists. These and others are obvious candidates to do the management. (At LettingFocus we have also advised on this issue in our consultancy role.)

But despite the outlook for this type of investment looking rosier, the promoters still needed to look to government for help via tax breaks to really make these schemes take off.  But in late September, a statement from the Treasury finally appeared to rule out future financial support for initiatives claiming that any institutional investment would always be no more than a “niche” in the sector. This came as a disappointment to “build to let’s” supporters.

How Does PRSI Affect Private Landlords?

Whilst the UK clearly needs more of the right type of housing stock, from the  private landlord perspective, the Private Rented Sector Initiative must be cause for concern because large numbers of new properties built specifically to be rented out can only have a negative impact on local rental rates. We’ve already seen how the large numbers of new build inner city flats that were built between 1998 and 2006 often had a very negative impact on rents (and ultimately capital values) in some towns. The same negative impact on local rents is also often visible when student accommodation providers open new dedicated student halls.

In the last few days it seems that Birmingham Council is about to approve a private rented sector initiative that aims to deliver up to 1,500 new private and intermediate rented homes over the next five years. Under the proposals the city authority will invest land in a joint venture company in exchange for an equity stake. Other members of the joint venture are understood to be contractor Willmott Dixon, consultancy Savills and housing association WM Housing Group.  But for now, the lack of special tax breaks may keep a break on any other new schemes.

All the same, the Birmingham initiative shows someone believes there is money to be made here and private landlords should keep a very close eye on developments as it’s clear that the entry of big commercial players building huge swathes of property to let out will directly compete with their business.

The most attractive locations for the Private Rented Sector Initiative will be London and other major cities, where large scale developments near tube and train stations will be the preferred locations that can bring in a strong rental income. “Build to Let” is one to watch.

MORE ABOUT LETTINGFOCUS AND WHAT WE DO

LettingFocus.com is the home of Private Rented Sector expertise and  Information for Landlords.

I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years. 25,000 copies sold.

Services to Businesses and the Public Sector

Primarily I am a consultant to a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors in the PRSI and insurers – helping them with their landlord facing or buy to let product strategies, marketing and services.

For example, I help banks improve their buy to let mortgage lending practices and I help housing associations / local authorities find private landlords (private rented access schemes, local letting agency models etc.)

I also write for property websites and am regularly quoted by the media.

Services for Private Landlords

We also find a limited amount of time to help landlords and property investors by coaching them in how to make money in the private rented sector using ways that work, which are ethical, fair to tenants and which involve minimal risk to the investor. We pride ourselves on giving independent unbiased Buy to Let Advice

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