Normally when we think of the role that banks have to play in getting us on the property ladder, we think of mortgages – not renting. But new moves from financial institutions in the UK could make us reconsider. So, would you rent a house from your bank?
Lloyds – one of the UK’s so-called ‘Big Four’ – has announced plans to buy and let a portfolio of properties on the private rental market. It has already identified its first site: it will rent out 45 apartments at a newbuild development in the East of England over the coming weeks, with a goal of acquiring around 400 properties this year and 800 next year.
The bank points out that it already does a lot of work to support buyers and homebuilders – on top of its Lend a Hand mortgage, which allows family members to contribute towards a first-time home, Lloyds has committed £9 billion in funding to social housing associations and invested £200 million in regional housebuilders, which it says has helped build more than 4,000 new homes.
But will this more direct approach have a similar impact – and importantly, will it be palatable to potential renters? After all, a bank entering the private rental market is a completely new proposition for UK consumers.
Would you rent a house from your bank?
53% Yes it’s a brand I trust 47% No, I would prefer not to
LinkedIn poll, July 2021, 17 respondents
Lloyds isn’t the only one getting in on the act. Legal & General has been involved with the UK’s private rental market for several years, amassing a portfolio of more than 5,000 rental properties currently let out or in development. In November 2020, it launched a dedicated ‘Suburban Build to Rent’ business that will aim to build at least 1,000 single-family rental homes in suburban locations across the UK by 2024. It has also recently invested in the construction of modular homes, as it seeks to build out that side of its business too.
Outside financial services, one of the country’s best-known retail groups is also taking note. John Lewis, which as well as a chain of department stores owns the supermarket Waitrose, is in the process of identifying land it already owns – corners of car parks or above stores – where it could build and rent new properties. The move could see the company become an institutional landlord with up to 10,000 homes over the next decade.
Rental demand in the UK
The business rationale is clear: in the press release announcing its entry into the private rental space, Lloyds pointed out that a fifth of all UK households currently rent. It expects to see demand rise over the next few years and is betting on existing landlords bowing out of the market, as a resurgence in renting leads to tighter regulations of the rental market.
The average house price across the whole of the UK is currently £254,624, according to the government’s House Price Index. For just England, that number is £271,434. That compares to an average rental value of £1,007 for new tenancies, according to the Homelet Rental Index.
The UK has one of the highest average house prices per square metre in Europe – beaten only by a handful of countries including Austria, Norway and France – but also has the ignominy of having the continent’s smallest homes on average. A newly built property will set UK buyers back an extra £80,000 compared to the cost of an existing home.
Europe’s most expensive homes per square metre
The UK has some of the most expensive homes per square metre in Europe, beaten only by the likes of Norway, Austria and France.
The construction of affordable new homes – or the lack thereof – is considered one of the UK’s biggest political hot potatoes. The country is currently building just shy of 250,000 new homes a year – but estimates suggest that the UK would need to build 100,000 homes more than that every year in order to meet current demand.
In addition, the UK average wage is £29,848, according to the Office for National Statistics. That means the average UK house is now more than 8.5 times the average salary. Even a household with two earners receiving £30,000 each would still face the prospect of buying a home worth more than 4.2 times their combined gross pay.
The benefits to renters
Could Lloyds, Legal & General and others’ entry into the UK private rental market offer benefits to potential tenants? For one, most of the companies entering the rental space are doing so with higher-quality new build properties which will offer better standards to tenants – but will also likely come with a higher monthly price.
Institutional investment could leader to greater security, particularly as build-to-rent investors are less likely than private landlords to sell up and move on. What’s more, larger companies are in a better financial position to waive tenancy fees as the incumbent build-to-let sector has done. Professional landlords might also be more willing to let tenants keep pets or redecorate, two things which are still considered taboo in much of the UK’s private rental space.
There will also likely be other benefits to tenants. Lloyds could obviously complement its build-to-let offerings with existing products, like loans and mortgages when the tenant is finally ready to buy. Because larger investors generally buy up properties in larger new-build schemes, they tend to come with greater perks such an on-site facilities. John Lewis, for example, is reportedly considering the option for prospective tenants to furnish their rental homes with John Lewis furniture and may even site a Waitrose convenience store on its new-build developments.
But it is not without its risks. Lloyds’ decision to set up a whole new subsidiary to manage its rental property portfolio, called Citra Living, is a reflection of the amount of effort required in maintaining a portfolio and adhering to the strict rules and regulations that exist in the UK.
It is not simple, it can go wrong.
There is a warning from Ireland, too. There, the government has been forced to act by larger numbers of investment funds buying out entire new-build developments to offer as rental properties. The Irish government has a target of 33,000 new-build homes a year but institutional investment in new developments is such a widespread problem that it’s expected that it could deliver as few as 12,000 this year.
Heather Powell, a partner at tax and advisory firm Blick Rothenberg, warns that “new landlords need to be aware of the challenges of renting homes”.
“The legislation governing the rental of UK properties has become increasingly complex,” Powell says. “New entrants to the market need to consider whether they employ an in-house team or outsource the management of their properties, and factor in the costs of this work when considering whether to become a landlord. It is not simple, and it can go wrong.
“If investment in a competent property management team is not made reputations could be shattered. Unhappy tenants can destroy the reputation of a landlord, which could have an impact on the letting and retail business, and potentially destroy the whole business. Any step into the world of landlords needs careful consideration, and investment in bricks and mortar and a management team with the knowledge and skills to make the letting business a success.”
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