Renting has become a rite of passage for young Britons - not just through necessity but also through choice.
Nearly half of 18-to-30-year-olds who participated in a recent survey by Osborne Clarke and FTI Consulting say that property is too expensive to buy (hardly surprising given the average house price of nearly £197,000 and the need for at least a 5% deposit). Others, though, said they prefer to rent because they can afford better accommodation (19%) or because they want to spend money on other things (15%).
Whatever their reasons for renting, these millennials want to live in city centres (26%) or in towns (31%), valuing the proximity of work, family, friends, shops and public transport links. For the housing market, meeting the increasingly discerning needs of this growing demographic presents new challenges and new opportunities.
The first challenge is to build enough homes to accommodate Britain’s growing population. The latest data shows that the number of homes completed in the UK rose by 10% over the past 12 months to 152,450. This is fantastic news, but the increase is only a drop in the ocean compared with the demand, with an estimated 240,000 new dwellings required every year.
A strong UK economy gives housebuilders good reason to increase construction, but they need to be assured of willing buyers at the other end. Until now, buy-to-let investors have played a key part. But plans for an additional 3% levy on the purchase of investment properties and the phasing out of existing buy-to-let tax breaks are likely to reduce the number of such investors in the short to medium term. That gives institutional investors a 3% head start over Mr and Mrs Smith, providing the opportunity for pension funds and insurers to step into the breach and help housebuilders build much-needed purpose-built rental homes.
The second challenge is to ensure the available accommodation is of high quality. Half of those surveyed complained that landlords do not do enough to maintain properties, with one in five saying they had moved house as a result. On the flip side, if the accommodation is right, renters are prepared to reward landlords with long tenures - on average most would expect
to change accommodation only twice in the next decade.
That will be music to the ears of institutional investors such as pension funds and insurers, which need the income security of long-term tenants and which, through their experience in commercial real estate, are accustomed to investing extra in durable, quality buildings and facilities in order to make this happen.
Indeed, institutions are increasingly seizing the opportunity presented by the UK residential sector and by millennial renters. Over the past three years, M&G Real Estate has invested in more than 1,000 homes across existing properties and developments spread over 17 sites - a small number when it comes to UK housing, but a good step in the right direction.
Alex Greaves is head of residential investment at M&G Real Estate