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Who will fund the growth in private renting?

It is a widely expected that private renting is set to grow significantly over the next decade but who is going to pay for it?

The changes are being driven by a myriad of factors including a decline in the numbers of social housing, changing attitudes to home ownership among young people, stricter mortgage lending and high house prices.

As a sector it has been growing slowly for a number of years and it currently hovers around 15% of UK housing but the list of those predicting further significant growth is extensive..

Capital Economics expects 17% of housing stock to be private rented by 2015, Paragon Mortgages predicts 20% by 2020 and a recent Cambridge University study estimates 22% by 2025.

There is a growing acceptance that the financial system is in the midst of another credit crunch as the Eurozone debt crisis saps confidence in the banking sector and funding costs rise.

Mortgage rates are rising and lending fall hence the Bank of England funding for lending scheme to offer banks loans as cheap as 1.2% to lend to small businesses and home owners.

In the mortgage market buy-to-let has been a shining light of growth but it is only modest and at an expected £15bn this year, compared to a heyday of £44bn in 2007.

Quite simply it is not enough money to fund the anticipated growth in buy-to-let so where is the lending going to come from?

Ian Potter, operations director of Association of Residential Letting Agents, questions whether there will be enough new housing stock to support growth assumptions.

“Unless we are going to get financing to build stock then it is difficult to see any significant shift of tenure as it can only happen within existing stock,” he says.

One of the government’s answers to housing stock shortages has to try to tempt big investors but with almost no success.

Mayor of London Boris Johnson recently told Mortgage Strategy he intends to host a roundtable discussion at City Hall to try to solve any issues with investment in London housing.

“I don’t think private renting is attractive for big institutions,” says Potter. “Rental yields across the UK generally are about 4.5% with little or no chance of capital growth in the short-term.

“Not many firms have invested in private renting and any that have invested have not got the returns they need.”

Even if the stock is built it is not likely to be built to the levels needed to support anticipated growth in private renting without huge estates of rented properties similar to housing associations or social housing but in the open market.

John Heron, managing director of Paragon Mortgages, believes corporate bodies are only interested in high-yielding, homogeneous specialist sectors such as student blocks.

“If tenants are looking for regular properties in a mixed community then it is more difficult to manages so these properties are dominated by landlords,” he says.

“The key difference between private landlords and corporate investors is their cost structure. Private landlords will invest time and effort largely for free whereas corporate firms need to employ somebody.”

So big money is not interested in the UK private rented sector because it is not commercially attractive but buy-to-let lending is not enough to support private landlord expansion.

It leaves the private rented sector with the conundrum of where is the money to pay for its expansion?


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