ARCADIS HOUSING DEVELOPMENT MONITOR
Measuring the viability of build to rent
Mapping out investment
Recent events have seen confidence in house building shaken and financial markets retrenched but demand for housing in Britain’s major cities continues to swell. With sales prices rising way beyond levels of affordability for most, build to rent could well prove to be a sizable piece in the jigsaw when it comes to taking the pressure off the nation’s housing market.
Arcadis have calculated how attractive each of the ten cited cities will prove to the core PRS demographic over a ten year period.
Despite the much cited figures about the number of homes Britain needs, multiple barriers to development exist and the solutions are not always clear. With the cost of buying a house showing no sign of falling within the reach of the next generation, the private rented sector will undoubtedly play a huge part in our future. However, devaluation of sterling has seen materials costs grow considerably, while the sheer dearth of people we have to actually build these homes continues to weigh heavy. In the midst of all this uncertainty, one fact holds true; if developers cannot find viable schemes, homes simply will not be built. The Arcadis Housing Development Monitor takes ten of Britain’s major cities and examines precisely how viable each location is for the build to rent investor.
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We have considered average land values and construction costs of a generic build to rent scheme. Assuming that the scheme is rented out at market value for ten years before being sold on, we have calculated total investment required as well as the profits available in each location. The profits per city vary considerably across the UK. The university cities of Edinburgh and Oxford top the table as offering the greatest returns with both promising investors more than double their level of investment. Meanwhile, the powerhouse cities of Manchester, Leeds and Birmingham also deliver eight figure returns, excluding finance. Perhaps unsurprisingly, the capital is the most costly city in the country for build to rent development but, even here, potential profits still come in at over eight figures. Where schemes are viable and opportunities exist, homes will follow. However, the picture is constantly changing. Capacity constraints and ongoing market uncertainty mean that we are still woefully bad at constructing the homes of tomorrow. John Carleton, Arcadis Head of Housing and Regeneration
PRS DEMAND INDEX
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PRS Rank
City
PRS Demand Index (London = 100)
1
Cambridge
101
2
Oxford
101
3
London
100
4
Edinburgh
99
5
Bristol
92
6
Cardiff
91
7
Manchester
88
8
Leeds
88
9
Birmingham
83
10
Southampton
79
1 2 10
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Return on investment Revenue and Cost of PRS EXCLUDING AFFORDABLE HOUSING AND COST OF FINANCE
KEY
105.3%
Oxford Edinburgh Bristol Leeds
Scheme Yield
Cost
Oxford
£93.9m
£45.7m
London
Edinburgh
£80.9m
£40.2m
Manchester
Bristol
£66.4m
£37.6m
Cambridge
Leeds
£58.3m
£38.2m
Birmingham
London (South)
£80.8m
£57.1m
Manchester
£58.3m
£41.9m
Cambridge
£59.5m
£43.4m
Birmingham
£52m
£39.8m
Cardiff
£47.8m
£38.7m
Southampton
£43.9m
£37m
Cardiff Southampton
23.4%
18.8% 100.9%
*Change to costs are approximately based on city centres with the exception of London where South London (Zone 2 – 3) has been used for illustrative purposes.
30.4% 37.1% 76.7% 39.2% 41.5% 3
City
52.6%
Methodology Calculating demand
Disclaimer
Using a number of indicators, including population and household projections, occupation levels and city housing supply figures, we created a metric to determine growth levels of the PRS target demographic on a city level over ten years.
While every effort has been made to ensure the accuracy of the material in this document Arcadis will not be liable for any loss or damages incurred through the use of this report.
The demand data model takes into consideration past and projected changes in socio and macro-economic conditions. A number of sources, including population and household projections by age and type, city housing delivery surplus and occupation levels, have been used to ensure that the picture is up-to-date and accurate.
Calculating cost and yield Based on a scheme of generic build to rent design norms (mix, unit size, management and amenity) of 151 homes, costs take into account average land values, construction, fit out and consultancy costs. Yields are based upon the homes being let out at assumed occupancy of five per week, reaching 100% by month seven from the practical completion date. Rental Income has been calculated on an assumed ten-year hold and then sold as an income yielding asset. The model does not take into account Section 106 obligations or the additional cost of finance.
Arcadis Arcadis is the leading global design & consultancy firm for natural and built assets. Applying our deep market sector insights and collective design, consultancy, engineering, project and management services we work in partnership with our clients to deliver exceptional and sustainable outcomes throughout the lifecycle of their natural and built assets. We are 27,000 people active in over 70 countries that generate â‚Ź3.4 billion in revenues. We support UN-Habitat with knowledge and expertise to improve the quality of life in rapidly growing cities around the world. www.arcadis.com. Arcadis. Improving quality of life.
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This report is based on market perceptions and research carried out by Arcadis as a design and consultancy firm for natural and built assets. It is for information and illustrative purposes only and nothing in this report should be relied upon or construed as investment or financial advice (whether regulated by the Financial Conduct Authority or otherwise) or information upon which key commercial or corporate decisions should be taken. Š 2016 Arcadis
Contact us If you would like to discuss anything within this report please contact:
John Carleton Arcadis Head of Housing and Regeneration e john.carleton@arcadis.com