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LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY UK PRIVATE RENTED SECTOR: LONDON COMPARED TO THE REGIONS | 1 R I V A V V T A A E R E N T E D S E C T O R : L O N D O N C O M P A P P R E D T O T H E R E G I O N S | 1 L A S A L L L E I N V E S T M E N T M A N A G E M E N T | R E S E A R C C H & S T R A T A A E G Y U K K P R The UK Private Rented Sector: London compared to the Regions LaSalle Research & Strategy January 2016 Contacts: Simon Marx Director of Research & Strategy +44 (0) 20 7852 4492 [email protected] Andrew Stanford Head of Residential – UK +44 (0) 20 3147 1440 [email protected]

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Page 1: The UK Private Rented Sector: London compared to the … · LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY UK PRIVATE RENTED SECTOR: LONDON COMPARED TO THE REGIONS ... people

LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY UK PRIVATE RENTED SECTOR: LONDON COMPARED TO THE REGIONS | 1RRIVAVV TAA E RENTED SECTOR: LONDON COMPAPP RED TO THE REGIONS | 1LASALLLE INVESTMENT MANAGEMENT | RESEARCCH & STRATAA EGY UKK PR

The UK Private Rented Sector: London compared to the Regions

LaSalle Research & StrategyJanuary 2016

Contacts:

Simon Marx

Director of Research & Strategy

+44 (0) 20 7852 [email protected]

Andrew Stanford

Head of Residential – UK

+44 (0) 20 3147 1440 [email protected]

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LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY UK PRIVATE RENTED SECTOR: LONDON COMPARED TO THE REGIONS | 2

The prospects for London’s economy and its residential private rented sector(PRS) market are undeniable, and keyindicators from independent sourcessupport this argument. However, focusingon London would be to the detriment ofmany regional hotspots which merit equalscrutiny and reveal some attractivecharacteristics of their own. In this paperwe examine the case for Londoncompared to the regions, and will showhow a truly national approach to investingin PRS opportunities is recommended.

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16 of the top 50 regional localauthorities have more PRS stock thanthe average London borough.

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Stock

The only indicator specific to PRS that is available consistently for all localauthorities across the UK is the numberof PRS households1. A higher volumeimplies a mature market with provendemand and so a low risk strategy shouldfocus on these larger, more liquid markets.Given its larger, urban population it is nosurprise that London leads on thismeasure. However, it is striking that asmany as 16 of the top 50 regional localauthorities* have more PRS stock than the average London borough. In additionamongst the larger markets, two inparticular surprise on the upside: Leeds iscomparable in size of stock to Manchester,whilst Brighton is comparable to Sheffield2.

Number of PRS Households

Source: LaSalle, ONS

Num

ber

of P

RS

Hou

seho

lds

(000

s)

Bir

min

gham

Man

ches

ter

Leed

sE

dinb

urgh

Live

rpoo

lG

lasg

owB

risto

lW

estm

inst

erW

ands

wor

thC

ornw

all

Lam

beth

Bra

dfor

dB

right

onS

heff

ield

Bar

net

New

ham

Eal

ing

Bre

ntTo

wer

Ham

lets

Har

inge

yLo

ndon

Ave

rage

Reg

iona

l Ave

rage

London

Regional

80

70

60

50

40

30

20

10

0

*As defined by LaSalle’s multifactor model which weights together 7 independent,forward-looking variables to score and rate all local authorities.

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Demand

Recent demand for PRS accommodationhas been relatively evenly-spread acrossthe country. Between January andSeptember 2015 each estate agent in the UK had on average 37 prospectivetenants each month3. This ranged from a low of 28 in Scotland to a high of 42 inthe South East – which also saw the moststable flow of demand. London also rankshighly on this measure, but most of theother regions are very close behind.

Looking forward, independent forecastssuggest that the average working agepopulation4 in each of London’s 33boroughs is set to grow by 9% over the tenyears to 2023, equivalent to almost 16,000people per borough. It is most likely thatthese people will largely comprisegraduates, young workers and migrants –all of which will require housing and willalmost certainly not be able to afford adeposit on a mortgage. On this indicator,London far outpaces the rest of the UKwhere, with few exceptions in major cities,the working age population will remainbroadly flat over the same period. However,this is the only indicator where such a widediscrepancy exists between London andthe regions. In all other aspects, growthexpectations are robust in most cases, and even exceptional in several.

Looking specifically at employment withinthe financial & business servicessector5 focuses our analysis more overtlyon the young professional worker – one ofthe target demographic groups for PRS.London is forecast to see almost 19%growth in this sector between 2014-23, but the rest of the UK is not far behind with14%, giving succour to the premise thatregional local authorities will see increaseddemand for all types of real estate. Indeed,the top 50 regional local authorities willgrow by an average of 16%, closer still to the London trend. It is not only growthwithin this sector but the size itself whichimpresses across many local authorities.London leads, with 29% of its employmentwithin the financial & business servicessector6. This is not unexpected given the

PRS Demand Per Estate Agent in 2015

Source: LaSalle, Association of Residential Letting Agents

Ave

rage

# o

f Pro

spec

ts J

an-S

ep 2

015

Sou

th E

ast

Lond

on

Sou

th W

est

Nor

th E

ast

Wal

es

Eas

tern

Eas

t Mid

land

s

Yor

kshi

re &

Hum

bers

ide

Nor

th W

est

Wes

t Mid

land

s

Sco

tland

45

40

35

30

25

20

15

10

5

0

London is forecast to see almost19% growth in f&b employmentbetween 2014-23, but the rest ofthe UK is not far behind. The top50 regional local authorities willgrow by an average of 16%.

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importance of this industry to the capitalcity. However, financial & business servicesare an important driver in many other UKlocal authorities also. The sector comprises18% of employment on average across theUK and 24% in the top 50 regional localauthorities. In cities such as Bristol,Edinburgh, Leeds, Manchester, theproportion exceeds 30%.

Whilst employment will generate demandfor real estate, the overall success andprosperity of a region is typically measuredby gross value add/GVA (ie local GDP).Strong GVA growth7 implies a strong town with thriving businesses, activeconsumers and high public/privateinvestment. The employment trendsoutlined above ultimately translate intocumulative GVA growth of 29% for London between 2014 and 2023. Again,regional UK follows close behind, at 23%.Impressively, ten of the top 50 regionallocal authorities each have growth inexcess of the London average.

Wealth is another consideration within the framework of our analysis, not only to highlight more prosperous and attractive local authorities of the future but also to account for the affordability ofrents/mortgage repayments. Unsurprisingly,London leads the way on this variable.Real disposable income8 here is forecast to grow by 33% over the ten years to 2023, but the regional UK average is acomfortable 24% and the average for thetop 50 local authorities is closer to 27%.

Forecasts 2014-23

Working Age Population

Financial & BusinessServices

GVAReal

DisposableIncome

Growth # Growth % Growth % Proportion % Growth % Growth %

London Boroughs 15,900 9.0 18.8 29.4 29.2 33.4

Top 50 LocalAuthorities

3,100 1.9 15.6 24.2 26.4 26.8

All Local Authorities –100 –0.3 14.3 18.4 23.0 24.0

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Supply

Average Annual Housing Completions

Source: LaSalle, ONS

Ave

rage

Ann

ual C

ompl

etio

ns (

000s

)

Lond

on

Bir

min

gham

Leed

s

Man

ches

ter

Bris

tol

Rea

ding

Sou

tham

pton

Cam

brid

ge

Oxf

ord

Brig

hton

1980s

Londonaverage offthe scaleat 16.9

1990s

2000s

2010s

0.0

0.5

1.0

1.5

2.0

2.5

3.0

At a national level the number of new homes completed in 2014 wasc.140,0009, far short of the 250,000recommended in various government-commissioned reports that is requiredmerely to keep house price growth at areasonable level. Construction has beenslowing consistently since the 1970s whenLocal Authorities were major contributorsto new stock and the average annualvolume of completions was comfortablyover 300,000. This supply/demandimbalance is one of the principal reasonsfor the strong house price growth andrelative resilience during economic crises.

Whilst we would expect these nationaltrends to reflect those of the contributinglocal areas, historic supply data at a locallevel is limited. We can examinecompletions since the 1980s at thisgranular level, although developmentactivity had already begun to slow by then.However, even since 1980 we notice thatwith each progressive decade the averagelevel of completions falls in most of themajor cities. The construction shortfallsince the Global Financial Crisis isparticularly evident in the larger cities ofBirmingham, Leeds and Manchester, aswell as in smaller land-constrained localauthorities such as Oxford and Brighton.By contrast, Bristol and Cambridge haveseen an upturn in construction over thisperiod. It is worth noting that London hasachieved a relatively consistent volume ofcompletions, and 2014’s total of 18,260was almost 10% above its 1980-2014average. However, even this falls far shortof the Mayor of London’s long-standingtarget of 42,000 completions per annum. It is therefore evident that supply in mostdynamic local authorities and cities will failto meet the demands that the growinglabour force requires. The pressure onboth house prices and rents is thereforehighly unlikely to slow as a result of supplydynamics for the foreseeable future.

The construction shortfall sincethe Global Financial Crisis isparticularly evident in the largercities of Birmingham, Leeds andManchester, as well as in smallerland-constrained local authoritiessuch as Oxford and Brighton.

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House Price Trends

London vs UK House Price Ratio

Source: LaSalle, Nationwide

Hou

se P

rice

Rat

io

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

London/UK Ratio

London/UK House Price Ratio Deviation from Trend

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

London vs Region House Price Growth

Source: LaSalle, Nationwide

Rol

ling

Ann

ual H

ouse

Pric

e G

row

th (

%)

Hou

se P

rice

Rat

io D

evia

tion

Fro

m T

rend

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

50

40

30

20

10

0

-10

-20

-30

0.5

0.4

0.3

0.2

0.1

0.0

-0.1

-0.2

-0.3

London House Price Growth

UK House Price Growth

London/UK HousePrice Ratio Deviation

from Trend

Examining the ratio of house prices in London compared to the UK average shows how thespread between the two has been steadily rising over time; from 1.25 in the 1970s to 2.3 in 2015.The strength of the UK’s capital city as a global financial centre, the influx of workers, and the lackof available land have all contributed to this. With these trends expected to continue there is noreason to suggest that the divergence since the 1970s will reverse in the very long term. Analysis ofspot data on two-bedroom flats10 shows a similar status quo to that of the earlier overall house pricedata, namely that the London/regional house (asking) price ratio currently sits at 2.2. Conversely, theratios for eleven other major regional markets unsurprisingly sit below 1, with the exception of Cambridge.

More relevant than the ratio itself, we should consider how far the ratio currently deviates from itslong-term trend as this will likely have more influence on growth rates during the next ten years. Onthis measure, today’s spread above trend is on a par with the record high set in the summer of 1987.What followed over the next three years was a narrowing of the spread, followed by an extendedeight-year period when the spread turned negative. A similar story unfolded during the next cycle, albeitwith less pronounced deviations. Whilst there is no certainty that historic trends will repeat themselves,evidence from the last forty years must be given due credence when anticipating the next cycle.

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Placed in context of the actual houseprice growth rates11, it becomes clearwhat is driving those changes in theLondon/UK ratio. A spike in London’sgrowth in 1987 to over 30% proved tobe unsustainable, and so growth slowedto zero over the next two years. In themeantime, regional house pricesunderwent a similar boom before alsoslowing. Following this, house pricegrowth across the UK turned negativein Q4 1989/Q1 1990, but the correctionin London was more pronounced thanelsewhere. It is worth noting that a fallin absolute terms does not necessarilyfollow a return to trend; in mid-2003 theLondon/UK deviation from trend turnednegative but house prices continued togrow right up until the Global FinancialCrisis was well underway in 2008.

The proclivity for London to lead therest of the country repeats in eachcycle; London recorded anotherspike/slowdown in recent quarters. Thishas placed yields under exceptionaldownward pressure, making the Londonresidential sector appear expensive tomany prospective home owners, andalso to those investors focused onincome rather than capital value growth.A chartist approach to forecasting wouldsuggest that regional house price

growth may now accelerate over thenext 12-24 months. Indeed, thecorrelation in annual house pricegrowth since 1973 between London & the UK average is high, at 0.85.Ultimately, a decline in absolute pricesacross the UK may transpire, but withthe low interest rate, low inflation, loweconomic growth environment expectedto endure for the foreseeable future, thisis by no means guaranteed. It is mostlikely that an external shock will beneeded to trigger a correction in amarket where the supply/demanddisequilibrium is so in favour of positive price growth.

We should also consider where houseprices sit relative to their ownhistoric trend. On this measure,London’s current average price of£443,40012 is 40% above its trendwhereas a regional average of£179,300 is only 6% above. These point to a stronger likelihood of priceincreases in the regions, and converselymore risk of a correction in London.Another indicator also gives cause forcaution in London; price volatility sincethe 1970s has been higher than in theregions13. And so whilst London deliversa more attractive house price growtheach year14, it is not without its risks.

Whilst London delivers a moreattractive house price growth eachyear, it is not without its risks.

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Affordability

Closely linked to the question of pricingis that of affordability although theconclusions we draw are mixed.Approximately half of 20-39 year olds areliving in PRS accommodation, and thisis expected to increase substantially15.Within an environment of extremely lowinterest rates, it is clear that theprincipal barriers to home ownershipare the size of the deposit, houseprices and low incomes16, rather thanthe size of the mortgage repayments.First, we examine the current askingprice for a two-bedroom flat17 in keylocal authorities and compare this to the local average net income18. We thenapply national assumptions based onsurvey data including the size of theaverage deposit19, the average savingsrate20 and even account forcontributions from parents21 – butexclude estimates of student graduatedebt22. The result is that it will take theaverage single first-time buyer almosttwenty years to be able to save for adeposit for a two-bedroom flat. Thisimplies a higher average age for thefirst-time buyer than those reported in other surveys. These place this atapproximately 30 years old (or 33 inLondon)23, possibly because low-depositmortgages are becoming increasinglyavailable once again or because thereare wide local variations in some of thenational assumptions we have used.Yet, with either methodology it isapparent that prospective owners willneed to embrace the PRS sector forseveral years to come. This will be thecase even if the outlook for earningsimproves considerably over the mediumterm, as the corollary of this wouldmost likely be a rise in mortgage rates.

Focusing on the regional disparities, it is evident that the high asking prices in London render affordability a majorconcern. However, renters in attractiveresidential markets with constrained landin southern parts of the country shouldalso expect lengthy delays beforebecoming home owners, for example in Brighton, Cambridge and Oxford.Affordability seems to be less of aconcern in the major cities of Birmingham,Leeds and Manchester. However, evenhere the average number of years ofsavings required to be able to afford adeposit on a two-bedroom flat is overseven. It is therefore safe to conclude thatdemand for PRS accommodation willbe robust for the foreseeable futureacross many regional markets.

Average years to Save for Deposit for 2-Bedroom Flat

Source: LaSalle, Zoopla, ONS, NS&I, Santander, Mortgage Advice Bureau

Year

s

0

5

10

15

20

25

30

Lond

on

Cam

brid

ge

Brig

hton UK

Oxf

ord

Bris

tol

Rea

ding

Sou

tham

pton

Car

diff

Edi

nbur

gh

Bir

min

gham

Man

ches

ter

Leed

s

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Despite the affordability issues inLondon and low levels of homeownership, survey evidence24

suggests that the number of likelyfirst-time buyers in London remainshigh – indeed, much higher than inother regions. This may reflect thelocal differences in savings ratios,mortgage rates or indeed parentalsupport. However, it also suggeststhat the potential market for futurePRS tenants (ie impeded first-timebuyers and those that do not wish to buy) is smaller here than in otherregions. The area which tops the listis the South West. Yet even in thisregion, the proportion of non-ownerswhich worries that they will never owntheir own home is a striking 80%25.

Combining the numerical and surveyevidence makes the conclusions from the affordability analysis slightlyambiguous. London’s lack ofaffordability suggests that PRS wouldprosper here. However, there are alsorisks in London, and so a nationalstrategy makes more sense on a risk-adjusted basis.

Homeownership Profile

Source: LaSalle, Halifax

Pro

port

ion

of R

espo

nden

ts

Sou

th W

est

Nor

th E

ast

Wal

es

Yor

ks

Sco

tland

Eas

tern

Wes

t Mid

land

s

Sou

th E

ast

Eas

t Mid

land

s

Nor

th W

est

Lond

on

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Homeowner

Likely 1st time buyers

Impeded 1st time buyers

Don’t want to buy

The number of likely first-timebuyers remains high in London,much higher than in other regions.

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Rental Growth

Whilst historic evidence on PRS rentaltrends is scarce, it is certainly clear thatthey broadly follow trends in houseprices with a lag and with less volatility.Limited evidence since 2006 shows ahigh 0.84 correlation between annualPRS rental growth and 18-monthlagged house price growth26. With thisknowledge we can infer from long-termhouse price data27 which themes mightplay out in PRS with a degree ofconfidence.

Since 2006 London has led the rest of the UK in terms of rental growth,with 3.0% per annum. However, ratesapproaching 2.0% per annum in boththe South East and South West are alsoimpressive. In more recent times, rentalgrowth across the country has onlystarted accelerating by any meaningfuldegree in the last 18 months. At Q32015 London again finds itself ahead of the rest, with 4.1% per annum. Yetagain, several regions track follow closebehind, namely the South East andEastern England. We would expectcertain regions which are still laggingbut contain at least one strong PRSmarket to catch up in due course, forexample the North West (Manchester)and Yorkshire & Humberside (Leeds).Other lagging regions without a cleardynamic PRS market may fall furtherbehind, such as the North East(Newcastle) and Wales (Cardiff).

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

25

20

15

10

0

-5

-10

-15

-20

4

3

2

1

0

-1

-2

Rolling Annual House Price Growth(advanced 18 months)

Rolling AnnualRental Growth

Rental Growth vs House Price Growth

Source: LaSalle, Nationwide, ONS. Rental growth data refers to England rather than UK

Ann

ual P

rice

Gro

wth

(%

)

Ann

ual R

enta

l Gro

wth

(%

)

PRS Rental Growth

Source: LaSalle, ONS

Ave

rage

Ann

ual R

enta

l Gro

wth

(%

)

Lond

on UK

S. E

ast

S. W

est

Sco

tland

Yor

ks

Eas

tern

N. E

ast

W. M

idla

nds

N. W

est

E. M

idla

nds

Wal

es

Since 2006

12 Months to September 2015

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

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LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY UK PRIVATE RENTED SECTOR: LONDON COMPARED TO THE REGIONS | 12

High

Low

High

Low

Economic & House Price Forecastsby Local Authority

Annual House Price Growth(2015-24)

Cumulative Employment Growth(2015-24)

ConclusionWith the exception of growth in its working-age population, the apparent gulf betweenLondon and many regional local authorities is not as wide as general perception suggests.For many indicators, certain regional hotspots come close to matching London’s potential,and even exceed it. The broad trends which characterise affordability – such as pricesversus rents, mortgage repayments, income levels, and attitude towards home ownership– affect all parts of the country without any discernible geographic bias. We see merit inconsidering a national PRS strategy which includes the top markets across the entire UK.This would include parts of London when pricing and individual opportunities allow, but therest of the country should play an important role in a diversified, income-based strategy.

Oxford Economics

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LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY THE CASE FOR UK PRIVATE RENTED SECTOR | 13

Notes:

1 ONS (2015).2 This may be in part due to the definitions of the local authorities analysed. Using

Local Authority District data shows that Manchester has 514,000 people livingwithin 116 sq km (ie 4,450 inhabitants per sq km) whereas Leeds has 761,000 peopleliving within 552 sq km (ie 1,380 inhabitants per sq km).

3 Association of Residential Lettings Agents (09/15).4 Oxford Economics (2015).5 Oxford Economics (2015).6 Within this, most of the growth is from Business Services rather than the Financial

subsector.7 Oxford Economics (2015).8 Oxford Economics (2015).9 ONS (2014).10 Zoopla (2015).11 Nationwide (2015).12 Nationwide (2015).13 Nationwide (2015) Standard deviation of 10.9% in London compared to 9.2%

in the regions.

14 Nationwide (2015) Average annual growth of 9.4% in London compared to 7.7% inthe regions.

15 PWC: UK Economic Outlook (2015).16 Halifax: Generation Rent (2015).17 Zoopla (2015).18 ONS (2014).19 Mortgage Advice Bureau (2015).20 National Savings & Income (2015).21 Slater & Gordon (2015).22 Student Loans Company: £21,180 for students in England starting repayment

this year (2015).23 Halifax: First-Time Buyer Review (2015).24 Halifax (2015).25 Responses range from 71% in North West to 82% in London.26 ONS (2015).27 Nationwide (2015).

Important Notice:

The sole purpose of this document is to provide information to you as an institutional, sophisticated or professional investor known toLaSalle Investment Management (LaSalle) and its affiliates to assist you in deciding if you wish to request further and more completeinformation in relation to the strategy described herein.

This document does not constitute an offer to sell, or an offer to buy, any securities or interests in any vehicle, or the advisory servicesof LaSalle or its affiliates (though, if this document is deemed by any law to constitute such an offer, then it is not being madeavailable in any jurisdiction where it would be unlawful to make such an offer).

To the extent that any investment opportunity relating to any of the matters herein is made available in due course, it would be offeredsolely on the basis of its own terms and offering materials and not on the basis of any information set out in this document.

Accordingly this document does not constitute an offer to sell, or the solicitation of an offer to buy, and is subject to correction,completion and amendment without notice. This document has been prepared without regard to the specific investment objectives,financial situation or particular needs of recipients. No legal tax or investment advice is provided. Recipients should independentlyevaluate specific investments. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell thispublication or copies of it and agrees not to make use of the publication other than for its own general information purposes.

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