UK Rental Crisis Needs £57 Billion Investment a Year

on Sep 19, 2012
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On 14 September 2012, The Times wrote that in a recent report, the global property services company Jones Lang LaSalle (NYSE:JLL) estimated that Britain’s private rental sector would need £57 billion investment a year so as to fulfil the growing demand for rental properties and break the cycle of rent rises. The growing competition for a limited number of rental properties is driving rents higher, with Bloomberg recently reporting that average rents in the UK reached record highs in August.

As noted in The Times article, the number of privately renting households has gone up by almost 48 percent in only five years, since the start of the credit crunch. In addition, if the trend continues, experts forecast that over the next three years, the number of tenants will grow to 5.4 million, or the equivalent of 23 percent of English households. According to Jones Land LaSalle’s report, as early as 2020, one third of the population could be private tenants.

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!m[](/uploads/story/417/thumbs/pic1_inline.png)As may be expected, the main problem arising from the growing number of future tenants concerns the limited number of rental properties available, with The Times reporting that according to property analysts, developers should be persuaded to build-to-let, and that big investors such as pension funds should be enticed into providing the necessary funding. Jones Lang LaSalle in particular has estimated that the buy-to-let industry cannot sustain a potential 750 percent increase in lending. “There will clearly be a need for new forms and sources of funding if the sector is to continue to provide affordable accommodation,” notes Jon Neale, director of residential research at Jones Lang LaSalle, as quoted by The Times.

Meanwhile, Bloomberg reported that the average rental cost of a home in the UK surpassed £800 a month for the first time, with the average rental amount increasing by 2.1 percent in August from a month earlier, according to an index compiled by HomeLet. The most commonly cited reason for the record UK rents is the restricted mortgage lending which in turn has prompted a growing number of people to turn to renting when searching for a new home. “This has caused an increase in demand, shortage in housing supply and increasing, and now record, rents,” points out HomeLet’s managing director Ian Fraser, as quoted by Bloomberg.

As noted in The Times article, buy-to-let investors are also feeling the consequences of mortgage constraints, with buy-to-let lending for house purchases amounting to £6.6 billion in 2011, relative to £23 billion in 2007, at the property boom height. Mr Neale sees a potential solution in the American “multi-family-model”, where funds develop large single blocks of high-quality accommodation specifically to let. The Times reports that there are more than 10 such funds in the US, with the largest one operating 550 “apartment communities”.

The Times also quotes Lucian Cook, director of estate agency Savills (LON:SVS), who recently argued in a presentation to 200 developers that rental Britain was an asset class with enormous potential. Mr Cook forecasts a 20.5 percent rise in rents over the next five years. “The private rental sector is expanding. The Government has got to house “Generation Rent” and they can’t just focus on homebuyers’ aspirations,” he notes as quoted by The Times.

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