Generation Rent and the Evolution of the Private Rented Sector

The evolution of the Private Rented Sector is upon us as buy to let renters of the last decade are starting families and the average UK first time buyer is now 37 years old (40 in London). There has been much talk of “Generation Rent”  but how is the letting industry evolving and keeping pace with this rapid change in the demographic of renters and their requirements?

Could letting agents be missing 30% of the Market?

At the NALS conference yesterday two separate speakers suggested that a significant proportion of tenants have children. One cited research to suggest that tenants with children make up 30% of the market, another presented research showing that 1 million PRS homes are let to families with children.

It is logical to assume that these families will not want to move home too often and to many agents this could be in conflict with their business model which relies on tenant churn to earn fees. This begs the question, is that why most letting agents end up managing properties for accidental landlords who generally only have one property to let, possibly two or three?

Are many letting agents missing out?

For most parents, keeping their children in the same school is important. For a portfolio landlord this must be good news as a long term tenancy is far more profitable. Any property which has been lived in for over a year will begin to show wear and tear when a tenant moves out and will need a spruce up to optimise its letting potential. However, if that tenant stays on the requirement for redecoration is likely to be insignificant for several years. Furthermore, tenants don’t like paying fees to renew a tenancy agreement any more than landlords do. Could this be a reason why tenants wanting a long term let seek to deal directly with landlords? Could this also be why most portfolio landlords choose to self manage?

It has occurred to me that agents who choose to adopt a different business model could end up winning significantly more instructions from portfolio landlords. The earnings per unit might fall significantly as a result of introducing a different model for properties let to families but logic tells me that economies of scale and reduced administration may well counter balance as a result of obtaining more instructions from portfolio landlords or landlords with properties better suited to families.

The bottom line for landlords, tenants and letting agents is viability. Right now I’m not convinced that many letting agents are considering how or why the next generation of landlords and tenants will develop and the associated opportunities.

Growth in family lettings

The buy to let boom over the last decade has increased the size of the UK Private Rented Sector by around 80%. The vast majority of the properties built in the last decade and acquired by buy to let investors were flats and apartments. These have also been the property type of choice for first time buyers over the same period. However, many of these buyers and tenants are now getting older and starting their own families. First time buyers of the last decade are choosing not to sell and are letting their former homes, thus spawning a new generation of accidental landlords. These new families, former first time buyers and renters of flats, now require a larger home and for the majority, renting is the only viable solution. Arguably, their requirements are better matched to those of the self managing professional landlords who though accident or prudence chose to go against the trend and invest into larger properties.

The letting agents who are more likely to grow their businesses

I suspect the smart new money being invested into the PRS will be looking to satisfy the demand for larger family homes. Will these investors accept the traditional high fees models of letting agents which involve churn or tenancy renewal fees though, and will their prospective tenants?

I believe that agents which promote a new business model aimed at this evolving market could well be the ones to enjoy the fastest growth over the next decade. I know a lot of landlords might believe that letting agents would be too short sighted and set in their ways to recognise, let alone grasp this opportunity. However, I have evidence which contradicts this. To my surprise, nearly 50% of the founder members of The GOOD Landlords Campaign to date have been letting agents. Speaking to a few of them at the NALS conference today, it was clear that some letting agents do indeed recognise The GOOD Landlords Campaign as an opportunity to get ahead of their competition by using the “deed of assurance” concept to develop a brand new business model. It was encouraging to speak with agents who plan to leverage the business model promoted by The GOOD Landlords Campaign to gain PR in their own locations via local press and media. This is obviously great news for The GOOD Landlords Campaign but equally, it is excellent news for the next generation of landlords and families wishing to let their properties.

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