The private rented sector (PRS) market is growing rapidly and lenders (which are no longer limited to banks) are identifying it as a growth opportunity.

Raed Hanna

While this is by no means a new asset class it is one that we anticipate being increasingly important going forward.

Many canny investors in this sector have changed the way these assets are acquired by cutting out the middle man. PRS investors have realised that if they “build to hold” there are significant discounts to be had compared with purchasing whole blocks from developers.

The typical saving on a direct build against purchasing a completed block can be 25% (the developer’s profit), or even more where planning risk is taken.

This ethos has been adopted in the student housing market, where the likes of Unite Group have successfully built to hold.

We have seen a significant spike in the PRS building programme under permitted development rights. A number of investors have shown how the regime can be used to convert redundant office space into residential apartments configured specifically for PRS tenants, meaning that whole buildings are converted with the idea that they are 100% let and do not include any owner occupiers. This gives the owner complete control over the asset and the costs associated with running it.

That said, traditionally we have seen the lending parameters for this asset class very much split into the “build” and “buy” categories. Lenders have never been particularly joined up in their attitude towards structuring debt in this respect.

They have sought to be niche players in the marketplace and have been divided between development finance and investment finance.

It’s time for this modus operandi to change. Banks need to look at the benefits of offering a one-stop shop where a “build to hold” client is not left with the refinance risk following the development phase.

Of course, development does not come without risk. Therefore, lenders should be rewarded for taking such risk with increased margins and fee structures. These margins should be reduced once the development reaches practical completion and again once a stabilised rental stream has been established — leaving the bank receiving the appropriate risk-reward premium.

The largest gain to the lender is the reduced loan-to-value ratios given the discount achieved via the self-build approach. As the loan is reduced, this lowers the interest cost and in turn improves the interest cover ratio.

This whole sector will continue to flourish as demand for rented properties continues. The lending community has a genuine opportunity to develop a new product and roll it out to the new group of developer investors.

Raed Hanna is managing director of MFL finance