The Market

Throughout the post-war period and until the mid-1990s successive governments have legislated to provide PRS tenants with both security of tenure and controlled rents and then reversed this legislation to make letting attractive again for landlords. Due to this uncertainty and the drive towards home ownership the proportion of the total housing stock in the PRS steadily declined to just 9 per cent. in 1992 from 20 per cent. in 1971. In the 1990's the introduction of Assured Shorthold Tenancies (ASTs) and other changes encouraged a small number of institutions to invest in PRS.

UK PRS has grown significantly since the 1990's and now comprises 18 per cent. of the housing stock. The majority of this growth has come from private individuals deciding to become 'Buy to Let' landlords. Landlords that own only a single property hold 40 per cent. of the UK's PRS stock and only 8 per cent. describe themselves as full-time landlords. It is a highly fragmented sector. To increase professionalism in PRS and encourage institutional investors to invest in much needed housing stock, the Government has introduced a number of measures. These include the introduction of Real Estate Investment Trusts in 2007, and numerous tax changes reducing the attractiveness of the sector to non-professional 'Buy to Let' landlords.

K and C believe that the UK is currently witnessing the beginning of the institutionalisation of PRS and that this investment sector is well positioned for growth in the coming years.

Savills research estimated that the total value of residential property across the UK was £5.75 trillion in 2015. In London alone, residential property value was £1.5 trillion.

The drivers for performance in the private rented sector include the following:

Demand drivers

The populations of the UK and London are forecast to grow substantially in the medium term. The UK is expected to surpass Germany and France as the largest European country by population by 2070. The ONS forecast for the population of the UK as a whole published in October 2015 predicted a total population of around 66 million in 2016-2017, rising to around 70 million in 2026-2027 and around 74 million in 2036-2037.

The UK is widely regarded as a secure, liquid, investible property market with a strong legal system.

The UK, is considered to be relatively safe and an enjoyable place in which to live and work. London is one of the world's leading financial and cultural centres.

The number of individuals in a household is decreasing due to smaller family sizes and higher divorce rates, increasing the overall need for housing.

Supply drivers

There is an existing under-supply of residential property. UK new build completions were just over 150,000 units in 2015-2016. The UK government is still committed to deliver 1 million new homes in the period 2015-2020 and a further 500,000 by the end of 2022. However, there is a growing consensus that the target to meet existing need, make up the backlog and make a meaningful improvement to affordability should be at least 300,000 homes per year.

Delivery of new property to the housing market is constrained by lack of land and planning restrictions.

Recent Changes to the Private Rented Sector

The UK PRS is rapidly maturing as an institutional asset class with an increasing number of professional and institutional quality investment managers. There have been several changes in the taxation of property over that last 4 years, all of which K and C believe are positive for the Company's business model.

The Annual Tax on Enveloped Dwellings (ATED) which curbs the avoidance of SDLT by selling shares in a company rather than the property itself. K and C is exempt from ATED as it is a professional landlord.

SDLT reforms increasing the level of SDLT for higher priced properties reducing liquidity in the entire residential market.

Reformed taxation of landlords, particularly affecting private "buy-to-let" landlords with an additional SDLT levy of 3 per cent. on buy-to-let properties (and second homes) and restricting tax relief for finance costs.

Removal of the "Wear and Tear Allowance", which allowed landlords to deduct a fixed percentage of rental income from taxable income to replace items such as furnishings and appliances regardless of whether they had done so or not.

From October 2017, the Prudential Regulation Authority will require lenders to "portfolio landlords", those with four or more properties, to implement a specialist underwriting process in respect of affordability of any new loans. These affordability assessments will include borrowers' tax liabilities, personal income and possible future increases in interest rates, likely reducing the availability and increasing the cost of buy to let mortgages.

As a non-taxable professional landlord entity typically purchasing existing company held property portfolios, the Company is generally not affected by these changes, which may increase the competitiveness of the Company as a purchaser of choice by current owners.