Putting a roof over generation rent
04 August 2015
Times have changed since I bought my first property in 1976. In the 1980’s there was a transformation in government policy for housing, with the introduction of Right-to-Buy. This, together with easier access to mortgage financing, led to the UK increasingly becoming a nation of homeowners. Property ownership has been a major factor in many families’ wealth accumulation and has supported social mobility. Meanwhile, the rental sector has also been characterised by significant change - a gradual decline in the share of local authority owned social housing, a thriving buy to let market since the late 1990s made up mainly of small private landlords, and, more recently, an escalating burden on the taxpayer from the housing benefit bill.
Our latest UK Economic Outlook report looks at recent trends in the UK housing market, including whether people rent or own the homes they live in. The data shows younger generations have to wait longer to buy due to the impact of the sustained decline in house building, an aging population owning their houses outright and increased deposits for first time buyers. As shown on our chart below, our projections are that the share of private rentals will to continue to rise, while the share of people owning with a mortgage will continue to decline.
Projections for UK housing tenure, share of households
Source: PwC analysis based on data from English Housing Survey and other sources
The chance to get on the housing ladder early in their working life is probably no longer an option for many millennials, who have increasingly become ‘Generation Rent’. This presents a variety of challenges: how do we provide enough homes in areas where people want to live and work; can we create the quality of accommodation that Generation Rent requires and what is the right balance between Government intervention and the free market?
Generation Rent, as they wait to get on the housing ownership ladder, should be an attractive segment for landlords. However, many have higher expectations and different needs than earlier generations of tenants. As consumers, they are used to a high level of 24/7 service and responsiveness from providers. They will be tech savvy and have access to a broad range of data helping them assess value for money and quality of life during their tenancy. Whilst they may be renting for longer than their parents’ generation, they may also be more willing (or more often required) to move as their world of work evolves. Expectations have changed. For example 64% of 20-35 year olds would like to work more flexibly and 38% of 20-35 year olds do not expect to work at one place for nine years or more according to our PwC NextGen study (2013) in My work, connected.
The Private Rented Sector (PRS) scheme comes of age
I believe one answer to this challenge is the rapid evolution and professionalization of the Private Rented Sector (PRS). In the past year the UK market has begun to see the development of a model that is already well established in the US and parts of continental Europe. The creation of ventures that combine the capital of financial institutions, the resources of developers and experience of service providers to design, build, lease and manage residential developments. A purpose built PRS scheme offers the opportunity to build homes for the long term, with success being measured on rental yields - rather than the value of the property at the point of sale. Economies of scale allow projects to be designed for ‘liveability’ and make better use of communal spaces, as well as including more units per scheme. Ultimately they are designed to generate long term sustainable revenues for their investors. These schemes can also include other elements designed around the broader needs of their tenants, including health, entertainment, transport and work – connected living (My life, connected).
One challenge for PRS is combining the right partners to finance, build and manage a portfolio of sufficient scale. We are beginning to see new Joint Ventures formed between institutions, developers and property managers to address this need, but the market here in the UK is still relatively in its infancy.
I believe that, in the right circumstances, this could be a great opportunity for Housing Associations to redefine their purpose. In our latest report, The housing association of 2020: distinctive by design we discuss six key areas they should focus on, including diversifying and commercialising services. Housing Associations have a wealth of experience in managing residential portfolios in the context of fostering a wider community and, as they evolve, they could have a key role in helping to house Generation Rent.
Recently George Osbourne set out the framework for his 2015 Spending Review, with one of the key focuses being public sector land asset sales with a view to building 150,000 homes in this parliament. A PRS model of public land, private capital and a credible social housing provider would be in a strong position to provide ‘best value’ both in generating income and delivering on policy commitments. It may take time to unlock the land, but returns – financial and social - could be significant. The challenge for PRS schemes has not just been the cost and availability of land suitable for development but a lack of support at a local level. The government’s recent Productivity Plan includes planning freedoms, introducing a new zonal system to give automatic permission on suitable brownfield sites and taking tougher action to ensure that local authorities are making land available for housing.
There is not one quick or easy solution to housing Generation Rent. However, I believe PRS could and should be part of the answer – notwithstanding the challenges around the complexity of a model involving multiple stakeholders with different ambitions. It is still early days for PRS in the UK: success for this model will depend on delivering quality, affordable housing, whilst generating the right returns for investors in the long term. With the right financial and policy support, including access to public sector land, I believe this model can work.
Ultimately the real estate sector has to respond to the challenge of providing suitable homes for Generation Rent. This is an opportunity we cannot afford to miss.