Considerations to maximise profits in the PRS market
The private rented sector (PRS) is growing rapidly in the UK. Homebuilding hasn’t kept up with demand, and a combination of evolving lifestyle requirements and affordability issues has changed the UK’s property landscape.
Reacting to a housing shortage that has warped into a housing crisis, the government is doing all it can to promote the PRS. Consequently, housing developments designed solely for the rental market are increasing in popularity. Here we examine the PRS opportunity, and factors that developers must consider to exploit the sector and governmental support, it is receiving.
PRS development profits are smaller than built-for-sale profits… aren’t they?
It’s a misconception that PRS profits are smaller for developers when they build to sell. However, those developers who pre-sell a whole development to institutional developers could be missing out on the benefits of rising property prices and increasing demand through a development’s life cycle.
By similarly treating the off-plan sales process to developments that are built predominantly for home buyers, you can maximise profit potential. However, developers must consider the different needs of renters when planning and building a PRS development.
Consider the target market
The major demographic in the PRS market place is the 25 to 35 age group. These are the people who have left home, completed their university education, and started on their career path. They want to leave their parental home and strike out on their own. These young professionals want an affordable home, a secure tenure, and lifestyle amenities that are close.
However, developers would be wise to target other social groups, too. For example, buy-to-let property investors are targeting the silver renter, baby boomer retirees and near-retirees who are relocating. Often, these renters have chosen to sell their own home and downsize to release equity and improve retirement finances.
Consider where renters want to live
Whichever end of the age scale, whether working or retired, today’s renters are insistent on location. They want to live near local transport hubs that can transport them easily to work or leisure facilities. In London and major towns and cities, the most successful PRS developments are medium to high density in one or more buildings, which also benefit from proximity to nightlife and leisure facilities, bars, restaurants, etc.
Consider the lifestyle requirements of the target market
Lifestyle is important to renters. Developers should consider how they can create community and a sense of place. It differentiates it from built-for-sale developments. Lifestyle amenities include communal spaces, gyms, concierge services, and so on. As well as providing a sense of community, such facilities can also generate extra income. They also tempt property investors, who understand that advantages of buying in a development that creates a sense of place attract longer-term renters, reducing void periods and maximising rental income.
Consider building management and home design
PRS investors, whether individuals or institutions are income seekers. They want to benefit from income over the long term, in an investment opportunity that helps to protect their investment. Maintenance of communal spaces and general building management are important considerations and will increase a development’s investment potential.
Developers should also seek to maximise space by innovative and creative unit design. Sizes and location should be considered. These will impact rental income potential. Investors also want flexible design, and the ability for some customisation will enhance their opportunity to ‘microtarget’ their ideal renter.
Consider the materials used in the build
Finishes must be high quality and designed to last long term. It is true of unit fixtures and fittings. It is also true of building materials, and the Grenfell Tower tragedy has highlighted the need for developers to build with the safest, most modern and highest-quality materials.
Consider how to take advantage of government support for PRS
PRS is now a mainstay of the government’s housing policy. It is committing billions of pounds to support PRS development across the nation. Housing zones have been targeted, with public land earmarked for release. Planning requirements have been relaxed to speed the process of development. Central government and local authority budgets have been set aside to improve the public realm and boost infrastructure, with transport, recreation and education top of the list. Developers that access these locational opportunities will attract the greatest interest from property investors.
Consider how to sell your PRS development
Institutional investors will usually insist on purchasing an entire development. They partner with a developer, providing finances for the development to start and move to completion. However, not only can this limit the profit potential for the developer, but it also increases risk.
There are several examples where the institutional investor has pulled the plug, and the developer has then had to restart the process of finding a partner investor (see Martin Sadler’s article, “UK property developers can be terrified by institutional investors”).
If a developer could sell to a range of individual investors simultaneously, they could offer the PRS development in stages, selling more as the development moves nearer to completion. It should allow the developer to increase sales prices, and maximise PRS development profits.
How does a developer access a multitude of individual investors?
The challenge for developers is not selling their PRS development but selling it well. Selling in one hit to an institutional investor may work for some developments, but it is unlikely to be the best strategy in all cases. It is the easy route – accessing large numbers of individual investors is hard work, and takes years of relationship building.
This is where Castlereach and our partners excel. Gladfish have sold nearly a billion pounds of investment property to investors at home and abroad. They have worked with investors for years, providing investment education, research and mentorship. Their list of investors may be among the most extensive in the UK property investment market.
We leverage this investor reach for the benefit of developers, enabling you to forward sell 25% or 50% of a PRS development. The decision can be made within days. You get the upfront funding you need, enabling you to maximise profits by selling the remaining development at a later stage.
Contact us today on + 44 207 923 5680, and we’ll help you leverage our investor access to maximise your PRS development project profits.
Live with passion,
Brett Alegre-Wood