John Lewis started the trend off last year. The department store group announced it would build and furnish rental properties. It was soon followed by Lloyds Bank and Boots as the trend for retail and finance giants joining the rental market grew.
But it was the announcement by Lloyds Banking Group in August this year that most 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 decade through its Citra Living brand.
The banking giant launched Citra Living in July 2021, apparently to satisfy the growing demand for private rented housing across the UK, although many believe the move was motivated by a need to diversify its sources of income.
The Financial Times claims to have seen an internal job advertisement from Citra Living outlining long-term targets including a ‘strategic challenge’ to own 10,000 properties by the end of 2025, with a further 40,000 by 2030.
The advert added that the new brand may consider mergers and acquisitions opportunities and/or strategic alliances’ 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 giving it an estimated balance sheet of £4billion and £300million in pre-tax profit.
The brand has already bought 45 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 banks follow?
Previous occasions where banking and finance giants have got involved with property have not usually ended well, in particular in the mid-80s when a number of major lenders acquired estate agencies before subsequently selling them off at a large loss a few years later.
But other banks and banking groups may be tempted to follow the lead taken by Lloyds, John Lewis and Boots in entering the private rented sector, which continues to grow in size as people increasingly rent for the long-term.
They may also look at the success of the Build to Rent model. While still niche, it has been growing fast in recent years and is now responsible for 195,598 homes in the UK, including in both London and the regions. Under the model, there are 62,274 homes built, 39,524 under construction, and 93,800 in planning. According to CBRE, the sector has seen £1.92 billion of investment this year already, with more expected before 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 1.7 million by 2031.
What could this mean for First Time Buyers?
Some fear that banks acquiring properties for rental will diminish the amount of stock available for First Time Buyers, 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 with purpose-built student accommodation and the rental sector with buy-to-rent and co-living.
There is also the argument that financial giants are diversifying their income and see more value in buying and renting out homes than in providing mortgages – traditionally their main form of income.
According to a recent article in The Times, titled “The banks beating First Time Buyers to new homes”, the Fletton Quays development in Peterborough mentioned above saw First Time Buyers 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 if buy-to-rent homes are in addition to the homes traditionally targeted at First Time Buyers, 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 will make it harder for First Time Buyers to get on the property ladder.
Those in favour of buy-to-rent and the rise of professional, corporate landlords argue that any new home is a good thing and can help to lower prices for First Time Buyers 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 to First Time Buyers in 2021.”
Many will point to the large number of schemes aimed at First Time Buyers – from the 95% mortgage guarantee scheme to First Homes, Help to Buy, Shared Ownership and Right to Buy – as evidence that this market is still being assisted in a big way, but First Time Buyers will continue to have legitimate concerns about being priced out of the market by bigger beasts with much more financial clout.
Lloyds insists it’s still passionate about lending to First Time Buyers, 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 First Time Buyers, but challenges remain
The outlook for First Time Buyers is much better than during the worst days of the pandemic, when most high loan-to-value mortgages were taken off the market as lenders battened 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 for First Time Buyers 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 First Time Buyers 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 suit in 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 mortgages to other forms of income.