Housing supply and demand
Current estimates of housing demand range from 250,000 to 300,000 new homes required each year. In 2014 the UK built 140,000 new homes – well below the amount required to meet household growth. This supply/demand imbalance underpins capital value growth (house price inflation). In this past financial year ending 30 September 2015, UK house prices grew by 6.1% according to the combined average of the Halifax and Nationwide house price indices.
While London and the South East continue to perform strongly, over the past year we have seen an increasing number of positive signs in the regions, particularly in the stronger core regional cities such as Birmingham and Manchester. In response, Grainger has increased its investment focus in strategic regional locations in England in order to capture future growth prospects. This past year we invested almost £90m in rented residential assets located in the English regions.
Growth in the private rented sector
One of the more pronounced changes taking place in the UK residential market is the sustained growth in the private rented sector (PRS). It has grown considerably since 2002, nearly doubling to 4.4 million households.1
This growth looks set to continue for years to come, with Savills predicting that the PRS will grow by 1.2 million households over the next five years.
The bulk of this rental demand has been driven by the 25–34 age group, the so-called ‘millennials’, with renters in this age group more than doubling since 2003. Today, one in every two individuals, between 25 and 34, rent privately in the UK.
Drivers of rental demand
The financial drivers underpinning rental growth since the recession are well documented. One example is the constraint placed on mortgage lending, particularly affordability and deposit requirements, making mortgages much harder to attain than they were previously.
The growth, however, in the PRS began in 2002, well before the recession when these financial drivers took effect. Social and cultural drivers have also been contributing to growth in the PRS. These nonfinancial drivers are less well understood so to help improve understanding of these factors, we commissioned an in-depth piece of research, which was published during this financial year2. It explores the emerging social trends in Britain and the impact that they will have on housing and the built environment.
According to this research, social changes such as more flexible working patterns, the sharing economy, later family formation and commuting preferences, among many others, are all supporting growth in the rental sector.
Other research we conducted also revealed that many people value the flexibility and the lower levels of responsibility associated with renting that they cannot get from home ownership.3
Population growth in urban centres, or ‘urbanisation’, is another major contributor to changes in the residential landscape in the UK and growth in PRS, with rental levels being more pronounced in cities. Between 2001 and 2011, the total population of city centres grew by 37%.4 London, in particular, has grown to 8.6 million people, and 26% rent privately. The Mayor of London predicts that London will reach 11 million people by 2050.
The growth in these cities has again been led by those young, highly educated, single residents, the ‘millennials’, the same group driving growth in the rental market. In particular, city centres have experienced the most pronounced population increase amongst those aged between 20 and 29. Almost half of residents in large city centres are now between 20 and 29.
Political and legislative factors influencing the rental market
For many years, Grainger has been championing the potential of the PRS, including Build-to-Rent, institutional investment and Residential Real Estate Investment Trusts and the contributions it can make to housing supply, to the economy and to standards of living.
Our efforts, together with those of many others in the industry with whom we have worked closely, has resulted in a broadly positive political and legislative environment for future investment in the sector.
Grainger takes a very hands-on, proactive and practical approach to managing these political and legislative risks. We engage regularly with politicians from all parties, as well as senior civil servants, to ensure that our views are heard and we are able to anticipate any possible risks to the business. By working constructively in this way we ensure that any possible intervention and changes proposed by any political party are positively managed to protect the interests of all stakeholders and do not damage future investment in the PRS wherever possible.
A market opportunity for Build-to-Rent rather than buy-to-let
The evidence supports that we will see sustained growth in demand for long-term, specifically designed rental homes in the UK – known as Build-to-Rent.
As previously outlined, an increasing number of households are wishing to rent and they are choosing to rent for longer periods in their lives. These rental consumers are increasingly expecting better value-for-money and better quality, and so driving increased competition.
We are facing a unique opportunity in the UK to create a professionalised, institutionally-backed PRS, with large scale, long-term landlords, providing tenants with safe, secure homes for rent at good value.
Over the coming few years, we expect to see continued support from central government for the sector. We are confident that we have the right measures in place to monitor, measure and mitigate the political risks to the best of our ability, and that with a positive policy environment and on-going market conditions, the PRS will continue to grow and evolve.
Grainger is best placed to take advantage of this opportunity by utilising its core skills and delivering good quality, long-term rental homes through Build-to-Rent.
1 English Housing Survey, February 2015.
2 Tomorrow’s Home by Lily Bernheimer, commissioned by Grainger plc and ADAM Urbanism, October 2014.
3 Survey commissioned by Grainger into the attitudes toward renting, 2012.
4 Centre for Cities, Urban Demographics: Where people live and work, Elli Thomas, Ilona Serwicka and Paul Swinney, July 2015.