A look at the recenttrend for banks purchasing properties to rent out and what it means forFirstTimeBuyers.
John Lewis started the trend off last year. Thedepartment storegroup announced it would build and furnish rental properties. It was soon followed by Lloyds Bankand Boots as the trend for retail and finance giants joining therental market grew.
But it was the announcement by Lloyds Banking Group in August this year thatmost caught the eye. The Financial Times reported that the group,the UK’s biggest mortgage lender, was aiming to buy 50,000 homes by the end of the decadethrough its Citra Living brand.
The banking giant launched Citra Living in July 2021, apparentlytosatisfy the growing demand for private rentedhousing across theUK,althoughmany believethemovewasmotivated by a need to diversify its sources of income.
The Financial Times claims to haveseenan internal job advertisem*nt from Citra Living outlining long-term targets including a‘strategic challenge’to own 10,000 properties by the end of 2025, witha further40,000 by 2030.
The advert added that the new brand may considermergers and acquisitionsopportunities and/or strategicalliances’to help it reach its targets.
Assuming it reaches its current targets, it would become a larger company than Grainger, the UK’s biggest private residential landlord, while also givingit an estimated balance sheet of £4billion and £300million in pre-tax profit.
The brand has already bought45 flats at the Fletton Quays development in Peterborough as part of a separate target to acquire 400 homes this year,followed by the same amount in 2022.
Will other banksfollow?
Previous occasions where banking and finance giants have got involved with property have not usually ended well, in particularin the mid-80swhen a number of major lenders acquired estate agencies beforesubsequently selling them offat a large loss a few years later.
But other banks and banking groups may be tempted to follow the lead taken by Lloyds, JohnLewisand Bootsin entering the private rented sector, which continues to grow in size aspeople increasingly rent for the long-term.
They may also look at the success of the Build to Rent model. While still niche,ithas beengrowing fastin recent years and is now responsiblefor195,598 homes in the UK, includinginboth London and the regions.Under the model, thereare62,274homes built, 39,524 under construction,and 93,800 in planning.According to CBRE, the sector has seen £1.92 billion ofinvestment this year already, with more expectedbefore the end of the year.
While the market is currently only responsible for around 5% of all rental homes, Savills has previously forecast that this could grow to well over 1.7millionby 2031.
What could this mean forFirstTimeBuyers?
Some fear that banks acquiring properties for rental will diminish the amount of stock availableforFirstTimeBuyers, in the same way that traditional buy-to-let has often been accused of. Rather than new homes being for sale, there is a growing trend for them to be purpose-built for rent. We’ve seen this in the student sector withpurpose-built student accommodationand the rental sector withbuy-to-rentandco-living.
There is also the argument that financial giants are diversifying their income and see more value in buying and renting out homesthan in providing mortgages – traditionally their main form of income.
According to a recent article in The Times, titled“The banks beatingFirstTimeBuyers to new homes”, the Fletton Quays development in Peterboroughmentioned above sawFirstTimeBuyers up against Lloyds Banking Group in a David versus Goliath fight.
“Britain’s second-biggest bank scooped up 45 homes — one in eight of those available — off-plan when they went on sale in September 2018,” the paper wrote.
“The banking giant is one of a growing group of large investors looking to shore up balance sheets by becoming landlords of residential properties.”
The article went on: “Banks, pension funds and asset managers are buying thousands of new-build starter homes. The homes never go on sale to ordinary buyers, but are packaged up and traded between banks, funds and insurance firms as assets.”
“Some financial firms are going into partnership with developers to have blocks built specifically to be rented out and to create profitable investment portfolios. Others are buying up homes that would otherwise have been for sale — as happened in Peterborough.”
Others argue that ifbuy-to-renthomes are in addition to the homes traditionally targetedatFirstTimeBuyers, there shouldn’t be a problem. But if too many new developments are swallowed up by institutional investment–attracted by the low risks, high yields, and secure, long-term rental income on offer –it willmake it harder for FirstTimeBuyers to get on the property ladder.
Those in favour ofbuy-to-rentandthe rise of professional, corporate landlords argue that any new home is a good thing and canhelpto lower prices forFirstTimeBuyers by providing more supply in the market.
Meanwhile, Lloyds told The Times: “Citra Living is embarking on a first step to provide incremental housing stock for the private rental sector. Lloyds has lent more than £9 billion toFirstTimeBuyers in 2021.”
Many will point to the large number of schemes aimed atFirstTimeBuyers – from the95% mortgage guarantee schemetoFirst Homes, Help to Buy, Shared Ownership andRight to Buy– as evidence that this market is still being assisted in a big way, but FirstTimeBuyers will continue to have legitimate concerns about being priced out of the marketby bigger beasts with muchmore financial clout.
Lloyds insists it’s stillpassionate about lending toFirstTimeBuyers, having lent huge sums this year alone, but critics will fear homes will continue to be taken off the market by large financial firms looking to secure a steady income.
An improving situation for FirstTimeBuyers, but challenges remain
The outlook for FirstTimeBuyers ismuchbetter thanduringtheworst days of thepandemic, whenmosthigh loan-to-value mortgages were taken off the market as lendersbattened down the hatches and employed a risk-averse approach.
Many lenders are now offering 90% and 95% mortgages again, boosted by the government guarantee scheme launched in April, while the number of great deals on offer are on the increase.
On the other hand, soaring house price inflation is continuing to make it difficult forFirstTimeBuyers to achieve their home ownership dreams, despite the assistance of various government initiatives and historic low interest rates. The deposits required to get on the ladder remain high, although most FirstTimeBuyers will still be aided by not having to pay any stamp duty on their first purchase.
For now, Lloyds Banking Group is the only major lender to enter the rental market, but it will be interesting to see if others follow suitin the coming months and years, depending on how well things go for Lloyds, and whether there will be a long-term shift from banks away from mortgagesto other forms of income.
