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  • Writer's pictureAnna Clare Harper

Private Rental Sector Trends

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We're trialling something new on the blog today - a full transcription of our latest episode of The Return: Property & Investment Podcast. AI isn't perfect yet, so please excuse any typos!

Here we go...

Hello, and welcome to The Return Property & Investment Podcast. I'm Anna, and it's just me today, I realised it's been quite a while since I didn't have a high powered, very impressive guest. And a lot has been happening in the market as well as in my world. So I thought I'd just take the opportunity to share some of that. I'm going to do it using some of the questions I get asked most frequently in my day to day work. So without further ado, here we go.

The first question is: what is happening in the UK private rental sector and how has this evolved over the last couple of years?

Okay, so in my view, this can be split into a number of key areas. The first and most important is social trends, I.E. trends for renters. And the big one here is just a growing supply and demand imbalance. What we've got is demographics driving demand. So we've got more households overall, shrinking household sizes, ageing population and immigration. And we've also got a higher proportion of households in the private rental sector, partly a result of affordability constraints to buying a home. We've also got supply, which is strictly limited. So we don't have enough in terms of volume to go round. And the result is that rents are increasing. We've seen double digit rent growth in many areas.

Rightmove released a report recently saying that average rents in London are over 31,000 pounds per year, and outside London, the equivalent figures over 15,000 pounds per year. Note that this is before bills, and homeowners with average household income of 32,300 pounds per year. So not a good picture.

The other aspect of supply that is problematic is the quality. Essentially, the quality of many existing homes is just not really good enough. And that creates its own social and environmental problems. So apparently 23% of private rental sector homes are non decent, according to the government. The truth is, though, the rental market is not one market, and it has been lots of institutional investor attention. But it's typically gone on either the kind of social more social end of the market, or the most premium end of the market. The mid market, which is where GreenResi focuses is the majority. And it's also the least served by institutional investors. Typically mid market, we consider mid market to be anywhere between 20% and 80% of average incomes. So that's typically in the region of 20 to 40,000 pounds per person income, 20 to 80 if you think about a two person household, and those mid market renters typically live in existing rental demand for those continues to grow. And supply is falling because traditional landlords are exiting the market. So that just about summarises the social trend. As to environmental trends, the critical trend here is just the acknowledgement that we need to do something about housing in order to meet net zero. About 14% of greenhouse gases come from homes in the UK. And reducing these is clearly essential for net zero, the carbon emissions from housing come from construction, and also from buildings operating both really need to be reduced to meet net zero. And in the private rental sector, there's a big requirement to improve existing homes because essentially, the way the housing market works, it's quite slow to respond, meaning that 98% of the homes that we use in five years time already exist. So there's all this talk here. And that needs improving, because in the private rental sector, at least 56% of it is below EPC C, which was the proposed minimum energy efficiency standard that has now died a death, but is a good benchmark, or what is sort of an acceptable level of energy performance certificate for a homes.

The third set of trends is around investors. So I like to simplify things. As you probably know, if you listen to this regularly, I see two types of investors. And of course, there's lots of subtlety to this. But let's just keep it simple. There's traditional by buy-to-let investors. So 82% of the private rental sector in England was made up of traditional buy to let investors who own fewer than five properties in their own names. This has changed because we've had tax changes regulations, and now high interest rates, meaning that it no longer makes so much sense for these kinds of investor to hold on to the assets that they already own. As a result, traditional landlords are exiting, and we see apparently 28% Less rental supply than pre pandemic. We've lost about 400,000 homes in the private rental sector since 2016. On the other side, you've got institutional investors. Now this kind of investor your pension funds and the like they love having an income that is in some way linked to inflation. They love resilient assets and they love being able to invest in something that is scalable. They also love an ESG narrative. And all of those things are potentially available from the private rental sector. To date, there's been quite a lot of investment in the private rental sector, many billions from institutions, but it's primarily been development, in particular build to rent or increasingly now single family housing, but all kind of new build developments. There is increasing recognition, though, that this is not enough, there's a high carbon cost associated with development, even if the offset, there is a high level of risk to development, there's quite high upfront cost. And the main thing really in relation to the social problem is that this kind of housing is not built fast enough to actually meet market demand and the growth in that market demand.

So that's a quick whistlestop tour of the trends.

Question number two, what does your business actually do?

Well, my business is called GreenResi, what we do is help institutional investors to buy and manage residential properties at scale, addressing some of those problems that I just described, in particular, seeking to alleviate the massive shortage we have in the UK of high quality, energy efficient mid market rental housing, while delivering attractive investor returns so essentially we specialise in bridging that gap between institutional investors with capital who are looking to allocate at least 50 million a year to residential. And then on the other side, the opportunities that are emerging as a result of all the regulatory and market changes I've described in the private rental sector. And to do that, at scale, what we've been doing is developing some tools in partnership with leading institutional investors to help them to grow residential portfolios, with an initial focus on acquisition, pipeline management, and portfolio monitoring and reporting. So essentially, it's all about solving a messy combination of social and environmental and commercial problems. And it's not easy to do, but we use technology to do that.

So the third question, which I'm brought nicely onto is, what problems do you actually solve?

There's very clear, huge social and environmental problems, which I've described already. And the issue is that they're not really being tackled by either policy or by existing approaches to institutional investment. And I guess, to just highlight how messy these things are, the social problems that I've described earlier, you know, the shortage of rental housing that's of adequate quality, creates business problems, because you know, if you start a business and you need to hire someone in the town that you're in, but there's no rental housing, no one can move there to take the job that you've created, rather than to take your job.

The environmental problems, in turn create health problems, for example, energy inefficient homes, that are cold, lead to increases in the propensity to end up in a hospital, that increases cost in the NHS, and therefore the exchequer, and so on, and so on, essentially, problems, read problems in other areas. And basically, they're not being solved through policy, because electoral cycles are too short. And these problems are quite long term in the making. I mentioned earlier that I think I mentioned earlier, that it takes about seven years, on average from a build to rent scheme, Inception to actually be rented out. And that's just one example of one scheme as an average. So essentially, what I'm saying is that we need a longer view on this. And the good thing is that institutions like pension funds tend to have quite long term time horizons, as well as a desire to have a positive impact in the market. So our customers are investors. And what they see as problems is they need inflationary income, they need the growth and resilience we talked about earlier. And as I said, they, I suppose, are struggling to an extent with build to rent because of the speed to get to market speed to cashflow positive, and the carbon intensity.

The real problem, though, is that it's relatively easy for institutions to invest in big buildings, they can scale up quite quickly, with a small number of decisions. But when it comes to existing housing, it's too expensive for them through traditional methods to go round each property in the portfolio and say, Do I want this? Do I not want this? Is there a problem with this? How do I solve the problem. So they need a way to understand each property is efficient so that they can efficiently originate and evaluate and acquire and upgrade and manage each asset. And that is where technology in general and GreenResi in particular come in to tech and data can be used to facilitate granular investments in a traditionally non professional private rental sector.

So on to the next question. Buying and managing residential properties efficiently is a big challenge. How does GreenResi navigate this complexity to ensure both institutional investors and also renters benefit?

Well, the first thing to say is yes, this is a big challenge. And just for context on what we've been doing, as I mentioned, we've been spent a lot of time developing acquisition, pipeline management and portfolio monitoring software and services. And it's all about giving efficient access to these assets at scale. What we do to do that is across three broad categories.

The first category is smart strategies. So that's all about using data to identify low risk, high growth, rental hubs, and then asset type. So for example, is there a low risk High Growth Hub near to Manchester or Leeds that the data particularly points in the direction of being a good place to invest?

The next sort of area is efficient origination. And this is about operating a largely automated funnel to generate leads, and then filter them down and evaluate to get the best assets at the best prices.

The third piece is about quality management. And for us, this is really about putting systems in place to ensure that there is no human error creating a negative renter experience and that things are managed really well and reported on really well and oversee all the potential issues and make sure they don't escalate.

So buying and managing residential properties efficiently is a big challenge. How do you navigate this complexity to make sure that both institutional investors and also renters benefit?

Okay, so firstly, I agree, it's a massive challenge. Just for kind of context on what we've been doing. I mentioned that we've spent some time developing acquisition, pipeline management, and then portfolio monitoring software and services. And we do this through kind of three broad categories of effort. One is around strategy. This is about using data to identify low risk, high growth rental hubs and asset hubs. For example, you know, which postcodes offer the best potential for rent growth, which asset types are most resilient, and so on.

But the second piece is around efficient origination. This is about automating what is traditionally a very manual time intensive set of activities, but they are repeated many, many times. So repeated, relatively manual, but not that complicated decisions can be the skills and made much more efficient using technology. That's what we do there.

And then the third piece is about quality management. So this is partly about process. And it's partly about people. And it's partly about technology, to ensure that there is an efficient, reliable, responsive, proactive set of activities, workflows, making sure that the right things happen at the right time. And just, I guess, a bit of market context, in the eyes of sort of real estate media, at least build to rent is seen as good and traditional landlords are seen as bad. Why is that? I think it is worth dwelling on that for a moment, because that's kind of the basis of what we've developed.

The first point is processes and systems. So build to rent tend to approach the processes and systems for management in a socially responsible, efficient way. And they focus on really being responsive and proactive.

The second point is realistic budgeting for maintenance, and a professional approach to maintenance. And again, that's where built around differs from the traditional landlord model, where then traditional landlords typically don't have huge budgets to be proactive, and they don't have maybe the training even to be as professional property managers.

The third point is about kind of effectively externalities. So in builds rent schemes, often there is kind of a an offering that gives a renter more than they're explicitly paying for. So that might be one of the features I've heard about is having dining rooms on site that the renter can just book and then host a dinner party, because the unit that they live in is relatively small, but they want to have their friends over for a dinner party. So we're getting a benefit. They're not explicitly paying for there and that externality marks out build to rent schemes versus traditional landlord schemes. So what we've got there is processes and systems, we've got budgeting, and we've got externalities. And what we've essentially spent the last 10 months doing is trying to ensure that we can deliver those three components in dispersed portfolios. That influences, of course, every part of the business, including what kind of assets we buy, where they're located. For example, we focus on very specific rental hubs that are defined by effectively diameter if you were to look at it on a map equivalent to a 15 minute drive time. And that there's a reason behind that, of course, because 80% of the benefits of colocation are available within a 15 minute drive. That colocation being, you know, if you compared managing a number of flats in a block, versus managing a number of houses, which were less than 15 minute drive from each other, you'd get almost all of the benefits. But you also don't have lift maintenance, which is quite a significant set of costs in a typical builder and block. The other thing that it influences is processes and automation. So my co-founder Duncan built a business called FixFlo, which is a leader in private rental sector repairs and maintenance, they are responsible for managing one and a half million or more, I think now, private rental sector homes. And there's an awful lot of lessons that we as business have learned from this. Finally, it influences how we monitor and report to investors.

So onto the next question, how do you measure impact across the granular assets. And what's the vision?

The vision part is exciting. Our vision is to provide a million underserved households with safe secure sustainable homes in line with the UN Sustainable Development Goals, in particular 10, 11 and 12. So that's reduced inequalities, sustainable cities and communities, and responsible consumption and production. And we do this by aiming to improve the quality of market affordable rental homes, which we see as the least served market segment. So we see this being really the fastest approach to helping resolve housing crisis. Of course, other strategies are required to solve the housing crisis. But this strategy has a lower carbon cost per home, and typically, a significantly lower financial cost and development risk and time lag. The impacts that we're measuring include the number of homes upgraded to Decent Homes standard or blue chip institutional quality, the number of homes retrofitted from brown to green, the affordability of homes in undersupplied areas, and the amount of money locally invested, for example, in local worker upskilling.

But with all these impacts, it's important to point out this is not a charity, it's a responsible investment approach. So commercial outcomes are really important too. And they're the kind of things that we the kind of returns that we target, I won't be too specific, but the kind of measurements that we look at are around counter cyclical growing income, for example, we have target average net distribution yields, which essentially is the income paid out to investors, after all the fees, we also have a target internal rate of return, which is essentially the net return. So that includes both growth and income over the holding period, for example, five or 10 or 30 years.

The next kind of component of results is around efficiency of access, specifically, the investors that we're working with mentioned that they don't want to have to hire people to access this asset. So for us, it's about giving them the ability to acquire and manage assets at a pace of our target is 120 million of granular rentals per hub a year without them having to hire.

And then the third component is all about scaling up. And really, if you were to put kind of a fine point on it, it's about catching up with our international counterparts. So the UK residential market is worth eight times the commercial real estate market here. But less than 2% of it is institutionally owned. Compare that with the US, Netherlands and Switzerland, more than 20% of the residential market is institutionally owned there. So there's a lot that we can catch up with and a lot of room to grow. And the way we see it is that the environmental and social benefits for mid market renters of systematically improving the quality and the management of homes that we already have are huge, as well as there being massive potential commercial wins. So hopefully I've answered some of the questions that you might have about what's happening in the market and what I actually spend my day to day time doing.

If you would like to find out more about GreenResi you can visit our website or you can always reach out to me on LinkedIn. And I look forward to speaking again soon.

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