The residential property market leans towards portfolio investments

Despite changes in the private rented sector, larger professional landlords continue to expand their portfolios as the residential property market continues to deliver an excellent return on investment.

Clear evidence of investor demand

Handelsbanken’s annual survey of professional landlords is a useful indicator of sentiment in the market. Its 2024 survey showed that residential flats are believed to be the most in-demand sector over the next 12 months, with 63% property investors ranking flats first in a list of options (up from 53% doing so in 2023). Residential houses rank third, at 61.5%, up from 46%. Overall, the mood is confident, with 62.5% planning to increase the size of their portfolio over the next 12 months (up from 59%).

The private rented sector shifts in favour of the ‘professional’ landlord

Partly in response to some amateur landlords leaving the sector, the demand for investment is more pressing than ever. A major piece of research for the BPF published earlier this year found that £250bn of investment is needed in Build to Rent (BTR) houses alone in order to meet future rental demand. That demand has been brought about by high house prices, greater geographical mobility and many people choosing the BTR sector as a life-style choice.

No fewer than 5m households (one fifth of all households) live in rented homes, of which 90,000 live in BTR and 4.9 million live are in the BTL sector, forming the majority of the private rented sector (PRS) today. As circumstances including government legislation, additional regulations (including the increasingly real prospect of EPCs of C or above being required of all landlords) and interest rates bite, some amateur landlords are leaving the sector.

Increasing tenant demand

And already, supply in the private rented sector is outweighed by demand: according to Rightmove, the number of tenants in the UK increased by 6% in 2022 but this coincided with 50% fewer properties being available, and we have seen similar figures play out across our LRG owned local lettings brands. These circumstances, added to the encouragement given by Government to institutional landlords, provides the perfect circumstances in which to invest in the private rented sector.

Increased take-up of portfolio investments

And so increasingly both individual investors and companies are drawn to managed property investments, which generally take the form of portfolio investments (unbroken/broken blocks or multiple properties owned by the same entity, typically a company or an investor, as a single package). Increasingly this is extending to the burgeoning ‘alternative’ residential sectors including student accommodation and later living.

Opportunities presented by change of use legislation

The return is even greater when the investor takes advantage of the recently extended permitted development rights (PDR) which allow for the relatively easy and cost-efficient conversion of commercial buildings to residential. I have seen some fantastic profits achieved by clients buying a commercial property such as an office building or retail unit (which now no longer needs to be long-term vacant), converting it to residential use through PDR and then either selling or managing it, benefitting from the substantial value uplift that residential property now offers over commercial.

A recent example of a successful change of use scheme is Chatham Waterfront, which sits alongside some purpose built BTR apartments managed by LRG. Chatham Waterfront is undergoing a very successful retrofit of an office building which will provide over 106 high specification apartments for rent.

Conversions created through permitted development rights, and therefore with minimal external alternations, can have limitations. But if done well – as Medway Developments has done in this instance – it can be extremely effective in utilising redundant office buildings and creating much needed rental homes. As an investment, is provides significant value in one or a small number of units.

Another is Peartree House, a former office block in Harlow, Essex. LRG instructed to sell the 26 apartments and we are confident that with an annual yield of 6.58% it will have strong investor appeal.

Commercial buildings, specifically retail, hotel or office premises (some of which may have originally been built as residential) can be well suited to residential use with very few changes required. Frequently these are attractive, perhaps historic, buildings, ideally located in popular areas close to amenities. Our planning consultancy, Boyer, advises on seeking planning consent for change of use to residential or doing so under Permitted Development Rights (a planning route which is generally quicker and less expensive than a full planning application).

Full planning permission is required if a property owner wishes to make structural changes in converting it for residential use. However, the relatively recent option of permitted development rights (PDR) can also provide permission for change of use without the need of a full planning application.

The popularity of newly converted schemes is demonstrated in HomeViews’ 2023 Build to Rent report, which surveyed over 36,000 residents and found that office to resi conversions achieve the highest resident approval ranking for all criteria, including design. Repurposed schemes, the report explains, are often located in central locations with easy access to local amenities and tend to be well managed with responsive maintenance.

BTR as a risk-averse investment opportunity

BTR, is increasingly seen as a particularly safe investment opportunity, because it is able to spread the risk through a blend of tenures ts. BTR appeals to investors over outright sale not only because of the ongoing return on investment but because due to lettings being faster to secure than sales, development timeframes can be shortened and profits delivered faster. The shift towards more rental properties also allows for site-wide infrastructure to be brought forward sooner, expediting the creation of a new community. This results in a value increase at an earlier stage in the development lifecycle.

For investors, there are other distinct advantages of BTR suburban communities.

In our 40 years’ experience as lettings and management agents, we have seen institutional investors disregard investment in individual residential properties on the basis that they are too fragmented and management-intensive. In BTR, on the other hand, a variety of property types (residential, commercial, retail and leisure) exist within a single portfolio, creating a combination of immediate sales revenue and long-term rental revenue, with the potential to spread the investment according to the market conditions.

Increased demand for professional services

In this ‘professionalised’ rental sector, it’s vital that sellers and investors benefit from quality, timely advice and an understanding of the intricacies of the market conditions. At times, making the right investment choices requires expertise on planning, surveying, management and lettings advice. This has prompted companies such as LRG to offer the full package, all under one roof, supported by enhanced technology: an online platform which showcases property portfolios to the investment market and provides data to enable customers reach information quickly and efficiently.

Whereas previously most forms of investment were managed through stockbrokers and asset managers, advances in technology – such as the data rooms available on our Portfolio Sales website – make it very simple for individuals to buy into a professional service while also retaining considerable autonomy in their investment.

Conclusion

The industry is clearly in do doubt as to whether the residential property sector will continue to escalate in value. The question is how those choosing to invest do so most effectively. With a new Labour government and the next Budget unlikely to favour high net worth individuals and investment funds, there is an increasing need to structure investments in such a way that capitalise on political change and are not penalised by it.