Britain’s housing shortage has become a huge political issue as the number of properties being built fails to meet the population growth in major cities such as London.
The UK’s housing market is vastly different from those in many European countries because people in Britain still cling to the aspiration of owning their own home. The residential market’s current climate of high property value and low housing stock is making this dream difficult to achieve. As a result more people are living in rented accommodation for a longer period of time than ever before.
The need for housing has resulted in a much larger number of private rented sector (PRS) properties entering the market. While developers continue to build their brand, their business and their properties law firms are looking to secure them as clients before the market takes off.
The changing market
From the Government’s point of view the PRS is difficult to control due to the majority of properties being owned by individual private landlords. This dominance of individual landlords is something Chancellor of the Exchequer George Osborne is looking to drastically change.
One of the biggest changes to the buy-to-let market was announced last month when Osborne said the tax relief landlords receive through their properties would be radically changed. As a result private landlords will pay out substantially more in tax, resulting in far lower returns.
“The Government has systematically destroyed the buy-to-let market and foreign ownership of private for sale housing,” says DLA Piper residential partner Jonathan Northey. “I think we’re in an incredible position to sit back and watch what impact that’s going to have.
“Commentators have suggested there will be half a million properties coming back onto the market as a result of people readdressing their buy to let investments.”
Northey argues that the biggest change will not come from the homes that could soon enter the market but by more direct action taken by the Government.
“The change will come from institutions going out and building shiny new buildings and shaking up the rental market from the mom and pop cottage industry that it’s historically been since the 1980s,” he adds.
One of the Government’s aims seems to be to take the rental market out of the private landlords’ hands and into the hands of development companies looking to generate income through building buy-to-let properties. There are already a number of developers specialising in the PRS sector but more may appear as overseas investors realise the potential of the UK market.
The major developers
One of the largest PRS developers currently operating in the UK at the moment is Essential Living. The company has worked on a number of projects including the development of The Perfume Factory in North Acton, London.
The development will include between 65,000 and 75,000sq ft of commercial space and between 480 and 550 privately rented homes. The approval for the site’s planning application is due to be announced this month (February 2016) after the land was purchased from Sapcote Developments in 2014 for £30m. According to The Lawyer Market Intelligence (LMI) Mishcon de Reya partner Nick Minkoff advised Essential Living on the deal.
Essential Living panel
- DAC Beachcroft
- King & Wood Mallesons
- Mishcon de Reya
- Pinsent Masons
- Taylor Wessing
- Trowers & Hamlins
- Winckworth Sherwood
DLA Piper has also advised Essential Living in the past on the company’s plans to develop housing in Croydon. But the formal panel roster may be set to change when the company reviews its legal panel in August. Essential Living may also be attractive to many firms due to the company’s heavy financial backing from Washington State pension fund, M3 Capital Partners.
However, Essential Living is not the only PRS company making an impact in the market with other big players such as Be:here and Fizzy Living involved in a number of substantial developments.
Getting in on the action
Berwin Leighton Paisner (BLP) and Eversheds have also been heavily involved in the PRS market. Eversheds has been particularly active in the student housing market and has carried out a number of deals for Luxembourg-based investment company LetterOne.
During 2015 Eversheds advised LetterOne on three major deals, which saw the company acquire 16 student properties. In the biggest deal LetterOne acquired Pure Student Living from private equity house Carlyle Group for £536m. BLP partners Chris De Pury and Celia Berg advised Pure Student Living throughout the deal.
Wragge Lawrence Graham & Co has also been involved in large scale PRS work for a number of years. The work itself falls to the firm’s housing development and regeneration team, which is led by Ashley Mitchell. The team also includes PRS specialist Richard Beckingsale who believes part of the firm’s success is due to its early entry into the market.
“We started almost as soon as the Montague Report was published back in 2012 looking at the PRS in terms of the potential to involve large institutional funds in building residential portfolios,” says Beckingsale. “I think we were ahead of the game. We worked on the early projects for Be:here, which is part of the Willmott Dixon group.
“That exposed us to investment from M&G Real Estate, which was one of the early schemes where institution money went into that sector. Since then we’ve seen a continued growth in instructions from developers, local authorities and from investors.”
The UK’s PRS market faces a number of challenges that need to be addressed to attract the type of foreign investment needed to grow the sector. One of these difficulties is balancing the needs of the local authorities with the priorities of the investors.
“From a planning perspective the planners still don’t know what they want from build to rent,” says Northey.
One option available for local authorities is to only allow rental properties to be built on land within the local authority’s area. However, this causes problems for banks and financers who wish to be able to sell the individual units should there be a default on the funding. However, the issues at a local government level can often be even more basic.
Northey adds that each authority has a different understanding of how to use PRS as well as often having very different PRS housing needs. For law firms this can prove difficult, as was the case when DLA advised on a development in Croydon.
“We did a deal, which was Taberner House in Croydon, and it fell victim to a change in council.” says Northey. “Changes at local government level can have a huge affect on development.
“They turned their back on the JV between Croydon Council and John Laing. We’d already signed papers for a purpose built PRS tower on the old council site. There was a change in politics and they tore up the development agreement.”
Despite such examples Beckingsale believes that the involvement of local authorities does not deter investors from entering the market. Instead he says that local authorities play many important roles in the development process. These include acting as the maker of the plans, striking deals with developers and through bringing forward its own land for developers to use. Wragges has also picked up work acting for local authorities looking to increase their involvement in the rental market.
“An area of work that we’ve increasingly been involved in during the last 12 months is advising local authorities on the formation of wholly owned development companies, the intention of which is to build up a portfolio of PRS homes,” says Beckingsale.
“So that’s an example of local authorities stepping into the role of developer and accessing finance to build PRS homes. I think it’s important that we don’t necessarily just see local authorities as a barrier to doing stuff. In fact they’re out there trying to solve some of the housing challenges.”
The team at Wragges has acted for four London borough councils on the formation of these companies. With the increasing demand for quality privately rented homes these new ventures could prove profitable for those law firms with local government clients.
Compared to jurisdictions such as the US and Germany the UK’s PRS sector is significantly underdeveloped. Law firms with international links may be well placed to cash in on Britain’s growing market as overseas investors look to enter the market.
“I think Jones Day has benefitted from their strong US connections in terms of picking up a couple of mandates from the likes of Greystar,” says Northey, “simply because Greystar landed and thought ‘who do we know from our US side?’.”
Northey also admits DLA has picked up a number of clients through the firm’s US presence, although the majority of his team’s work is still carried out for UK clients. These include Quintain, Mace Group, Delancey and Peabody.
The ability to attract clients to the UK through a firm’s international connections has not been lost on the team at Wragges. The firm is set to merge with Canadian heavy weight Gowlings and on 22 February will become Gowling WLG. Beckingsale is already aware of a number of potential Canadian investors interested in the UK market.
According to Beckingsale Wragges’ biggest competitor in regards to PRS work is BLP. Although BLP has increased its international presence it has so far failed to open its doors in the US. However, the firm may soon have access to a host of US clients looking to act in the UK should its merger talks with Greenberg Traurig come to fruition. If this happens the PRS market could soon be dominated by law firms with a foothold in North America, all battling for a share of growing instructions.