Demand for student digs exceeds supply

The return of institutional landlords to the private rental sector is starting to change the face of the UK market, but it has some way to go before it matches the profile of investors in the US and Germany.

student-propertyThe Private Landlords Survey carried out in 2010 found that 89% of landlords in England were buy-to-let investors and 92% of private landlords ran their property portfolio as a part-time business. However, just 1% of private rental property was owned by institutions, compared with 13% in the US and 17% in Germany.

Many institutional investors left the private rented sector when controls were introduced in the 1960s but with private rentals now overtaking social housing as the second most popular type of occupancy that is likely to change.

The rental sector has been growing at an average rate 5.4% each year since 1999 and now makes up 19.4% of households. As it develops into a service industry, a new market is emerging known as the build-to-rent sector that includes new-build developments that often come with luxury facilities, such as a gym and a concierge service, and schemes designed for students that encourage institutional investment.

The rental sector has already attracted £2bn of institutional money every year and over the next three years this could double as pension funds are lured in by the attraction of long-term returns.

Despite the government establishing a guarantee scheme that offers loans backed by the state for BTR companies that have been financed through the bond market, investors are still wary of the risk.

Not only is there a shortage of existing buildings available for redevelopment, it is proving difficult to convince local authorities to free up land that is both suitable for rented housing and being accepted for BTR schemes.

London Mayor Boris Johnson has already set a target of 5000 new homes for rent and other local authorities may look to do the same as demand already exceeds supply. However, the number of properties on the market needs to increase considerably to stop rental prices from rising.

This should give investors in new-build schemes for students the confidence that they will continue to deliver healthy returns for many years.