In the second blog of our Private Rented Sector series, our Real Estate team discuss the Private Rented Sector (PRS) as an attractive investment opportunity and compare and contrast other nation’s sectors against the pros and cons of the UK.
In the UK 89% of landlords own a single property with 92% of those combining managing their property with another occupation. It is thought though that the reintroduction of institutional investors could professionalise the sector and introduce more choice for tenants. The PRS can be an attractive proposition for investors: growth in the private rental sector shows no signs of slowing down; the residential asset class provides better returns than many commercial assets; the Bank of England have erected barriers for smaller investors and the government have introduced favourable tax policies for larger investors.
Australia’s PRS bears the most resemblance to the UK. The Australian PRS market has single property landlords with very little involvement from institutional investors. Australia has an advantageous tax system in the form of “negative gearing” which allows investors to set off losses made against rental property from other areas of income, which is attractive to people paying higher tax rates. Investors also get a 50% CGT tax discount when selling their property as long as it has been held for more than a year. This isn’t attractive to institutional investors because it doesn’t return the same level of yield as would be typically expected for large scale alternative investments.
Germany and Switzerland have established rental sectors. Germany has strong tenant law and Switzerland have the largest level of institutional investors in Europe. Swiss law dictates that institutions are required by law to invest in real estate and so the rental sector forms a large part of many portfolio assets. The Swiss focus on long term income yield by relying on strong tenancy laws and a low vacancy rate. Despite rent controls landlords are still allowed to increase rates to cover costs which allow more flexibility for investors. Germany has experienced growth in institutional investors also due to its established rental sector.
The US is the largest institutional real estate market in the world and residential investment accounts for 22% of portfolios (in the UK this is just 4%). In the US, Funds develop large apartment blocks to rent and tax breaks for RETTs have increased the financial viability for schemes. Since the downturn renting has increased and so has institutional demand creating a steady income stream.
To find out more about the issues raised in this post, or to discuss any queries regarding the private rented sector and real estate get in touch with Ruth McCarthy, firstname.lastname@example.org or call 0161 833 9211
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