Your next landlord could be a bank. Or at least that's what Lloyds (LLOY.L) is hoping as it lays foundations for a push into the build-to-rent sector.
Searching for a return on investment following a particularly volatile period due to COVID-19, the rental sector has, in comparison to other sectors, weathered the storm well. And with a housing shortage and booming urban populations in the UK, the good times look set to continue for landlords.
Build-to-rent is the industry of new build apartment blocks owned and managed by one landlord. These are built specifically for renters, as the name would suggest, and include at least 50 homes each.
First landing in the UK in 2016, the build-to-rent sector used to be something of a novelty, and still occupies a small portion of the market.
As an import from the US, it is perhaps typified by swanky well-connected office blocks. Companies such as Tipi have led the way in the market, promising zero fees or deposit, clean social spaces and a "cared for neighbourhood".
In theory, these apartments could be the answer to many of the current issues renters face, from short-term leases to "cowboy" landlords and crippling fees.
Tipi flats are decked out through corporate partnerships and offer concierge services that will collect and do your dry cleaning.
According to estate agents Savills (SVS.L), annual rental growth in the UK has seen median asking rent rising nearly 20% in the year to April 2021. This has corresponded with a reduction in the number of properties available on the market, which has been trending downwards since 2018.
While growth has been strongest in suburban and rural areas, Savills said the market is now reaching a turning point as demand once again outstrips supply in urban areas.
Partly responsible for the reduction in rental listings nationally, is the continued exodus of mortgaged buy-to-let landlords from the rental market (more than 180,000 mortgage redemptions since Q1 2017).
The 4.4 million households in England’s private rented sector are owned by 2.3 million landlords, according to the Ministry of Housing, Communities and Local Government.
By most estimates, build-to-rent stock only accounts for just 2% to 3% of the UK’s pool of rental housing.
Watch: Am I wasting my money by renting?
Now, Lloyds Banking Group has begun an aggressive push into sector, setting up its own private home rental brand, Citra Living. Laying out ambitious growth plans, it is looking to own a portfolio of 50,000 homes by 2030, a move which would make it the biggest rental landlord in the UK.
The total ownership would be the equivalent of about 1% of the total UK rental stock, according to data from Savills.
On Wednesday, the bank also launched a partnership with Homes England pumping in £300m in a move that aims to "bridge the homebuilder funding gap, allowing housebuilders to build more homes across the UK and grow their businesses".
John Lewis (JLH.L) last year also set out a five-year plan to move “beyond retail”, including building homes for rent.
The department store announced it would invest £400m in new areas, and aim to make 40% of its profits from them by 2030. It is aiming for profits to reach £200m per annum within the next two years.
At the time, it said it would work with developers to build new homes on up to 20 sites already owned by the partnership to provide a “stable income”, with planning applications expected for two sites next year in Greater London.
“Entering the ‘build to rent’ market also allows us to furnish properties using John Lewis Home products and deliver Waitrose food,” it said.
Retail banks have previously struggled to diversify out of their core areas. Lloyds' previous push into PPI cost the bank more than £20bn in compensation payments for mis-sold plans. Other lenders could follow into build-to-rent in a hunt for stable profits as a literal land grab ensues.
What does it mean for consumers?
Those that are optimistic about an increase in the build-to-rent market say it could mean more protection for renters in the long run.
"The hope is that a larger corporate landlord such as Lloyds Bank would have the infrastructure, expertise and finances to ensure that they comply with their legal obligations, as opposed to smaller and 'rogue' landlords, meaning tenants should be provided with the information and protection they are entitled to," says Sophie Bell, partner in the housing team for social justice law firm, Hodge Jones & Allen.
Meanwhile, the move towards corporate ownership of houses could spell trouble for consumers in an increasingly inaccessible housing market, creating a tricky terrain to navigate, fostering monopolies and pushing up rents.
“The only upside for consumers is it may, and I emphasise the word may, bring lower rents if there are more properties to occupy,” says Lewis Shaw, founder and mortgage experts at Shaw Financial Services.
“However, the likely outcome is that the opposite will happen; it would be very easy for large institutional investors or lenders to monopolise large swathes of an area and increase prices.”
In terms of affordability, the government’s guidelines suggest that all build-to-rent developments should have 20% of the site designated to affordable housing. although this can be challenged by local authorities should they wish to set a different proportion.
What constitutes "affordable" is still seemingly up for debate, though. At the moment that's defined as a “20% discount on the private market rent”, which is likely to be an amount the developers choose to set. This level could still be out of reach for many.
Another issue with build-to-rent could be that it will make it more difficult for people to own their own home.
“There’s already strong demand in the housing market, which would likely intensify if big banks start buying large numbers of houses.
"This has the potential to push-up house prices further and out of the reach of first-time buyers," says Catherine Kennedy, a partner and head of housing and regeneration at Forbes Solicitors.
Read more: UK rents hit decade-high as London lags
“It’s possible that Lloyds won’t be the only bank to make such a move into buy-to-let, as lenders are diversifying amidst a climate of low interest rates and smaller returns on higher risk mortgage lending."
Despite build-to-rent's issues, the problem of affordable and viable renting options isn't going away. Rental homes are set to remain in high demand with house prices currently rising at their fastest rate in over 15 years.
Many first time buyers (FTBs) still struggle to access homeownership, despite schemes to help, and will now be renting for longer. This trend is already underway as mortgage approvals for FTBs declined 6% across the country in the year to March 2021.
What's clear – despite the potential issues – is that, as house prices rise in the UK and home ownership becomes more difficult, this is a sector only poised for growth.