Building and renting to lower income families can provide attractive returns for big investors

A low-risk income return of 4.7 per cent should be achievable for institutional investors putting money into the private rented sector – a move which could also help solve Britain’s housing crisis for families on modest incomes – suggests an economic study published today.

The report identifies a £140 million property portfolio, made up of almost 800 rental homes around the country which are already being built or planned by not-for-profit housing providers, and models in detail the profit that a commercial stake in them would return. It shows that it should be possible to achieve a 3.9 per cent return on incomes alone, rising to 6.5 per cent or more on total returns – which include both income and rising capital values, at modest inflation. By selecting developments with the highest returns and managing them more efficiently, the income return could be pushed up to 4.7 per cent and the total return to 7.3 per cent.

At the same time, the project demonstrates that in every region of the country, not just London, there are areas where this model can provide good quality rental homes to families on restricted incomes – as low as £22,000 a year in the case of a couple with one child.

The findings provide the first economically watertight demonstration that large-scale investment in building private rentals can be profitable enough to make it attractive to fund managers looking for a competitive and predictable return on their money.

The new study, from not-for-profit intermediary Social Finance and independent think tank the Resolution Foundation, models in detail the potential costs and returns on a portfolio of 778 properties, primarily two and three-bedroom homes, spread across the country and being developed by six different housing providers: Dolphin Living; Derwent Living; Green Square Group; Great Places; Home Group and Plus Dane.

Under the model set out in the report, housing providers would identify and build private rental developments, using their market knowledge and access to preferential borrowing to keep costs low and returns high. Investors could then buy a portfolio of fully-occupied properties and take the rental income. Housing providers would continue to run the properties, giving residents good management and secure, long-term tenancies of up to three years, with rents of between £115 and £500 a week. Annual rent increases would be tied to inflation so that tenants would not face unexpected hikes.

The report suggests this could kick start a market in build to rent which has yet to take off in this country. In Britain, most private rents are still offered by small scale buy-to-let landlords, a contrast with the US and many other parts of Europe where institutional ownership of private rentals is common. Britain has 3.8 million households in private rented accommodation, of which a third are families with children. The proportion of households living in the private rented sector was 17 per cent in 2012 – up from 10 per cent in 2001 – and many tenants have difficulty finding rentals which are affordable and secure.

The report demonstrates that with 100 per cent occupation at local market rates, the portfolio would bring in annual rent of £7.8 million. After deducting management costs and allowing for voids and bad debts, this leaves a net income of £5.4 million.

At the same time this model would offer rents that are affordable for a family on a median income (£27,600) and a modest income (£22,000) – consuming less than 35 per cent of their net income, a common definition of affordability in housing. A family on a very low income (£18,600) would still not easily be able to afford any of the rents at these levels however, underlining the need for more social housing.

While the report makes clear that no new legislation is needed to make this model work, it also makes a series of recommendations to government, local authorities and housing providers on how they could help encourage institutional investment. These include:

· Designate some public land to be developed only for the private rented sector

· Publish planning guidance which treats build to rent developments differently from developments for sale with regard to affordable housing obligations – recognising that the two types of development are economically different

· Ensure that an outcome of the current consultation on the role of housing associations is to give them some flexibility between market activity and their core social housing role

· Use build to rent as a source of extra housing, not a substitute for building affordable housing
Vidhya Alakeson, co-author of the report and deputy chief executive of the Resolution Foundation, said : “A private rent is the only housing option for a growing number of people who can’t afford to buy property yet don’t qualify for social housing. We urgently need more affordable options in the private rented sector, and drawing in large-scale commercial investment would help to build some of those new properties. This study shows that it’s possible to guarantee investors a good return while giving tenants better-quality, more secure, affordable housing.”

Nick Salisbury, co-author and Social Finance housing director, said: “The social impact for over a million families with children living in an unpredictable private rented sector is significant. Build to rent projects are typically very capital intensive but the sector has been neglected by institutional investors because of its perceived unprofitability. This report shows that there is a financially robust model for housing providers and investors to build at scale.”

National Housing Federation assistant director Stuart Ropke said: “With more people and families renting privately, and with rents expected to rise 46 per cent by 2020, it’s vital we have a build-to-rent market that keeps rents affordable and provides a better option for many communities struggling with high housing costs. This report illustrates how Britain can do this in a way that is attractive to housing providers and investors – and which provides decent homes that people and families on lower incomes can afford.

“Housing associations want to build more high quality private rented homes. As local organisations that know their neighbourhoods and local authority partners well, they are perfectly placed to make them more affordable and secure.”

Ends

Notes

1. The report, Building Homes for Generation Rent: can institutional investment deliver, is by Vidhya Alakeson, Katie Blacklock, Sandra Halilovic, Tim Rothery and Nick Salisbury. It will be published online at www.resolutionfoundation.org and www.socialfinance.org.uk

2. The property portfolio on which the study is based is made up of 16 developments, either built, under construction, or going through the planning process. They are in London, the South West, the North West and Scotland.

3. Family incomes quoted in the report are post-tax and benefit incomes.

4. The report will be launched at an event at the Resolution Foundation at 9.30am on Thursday. Speakers will include David Hutchison, Chief Executive of Social Finance, Vidhya Alakeson, deputy chief executive of the Resolution Foundation, Nick Salisbury, director of Social Finance, Grainia Long, chief executive of the Chartered Institute of Housing, Brian Ham, chief executive of the Dolphin Square Foundation, Nigel Wilson, chief executive of Legal and General. The event will be chaired by Clive Cowdery, chairman of the Resolution Foundation.