Build-to-rent is an emerging property class that is attracting attention in an uncertain climate as an alternative form of development.
In a recent report from The Guardian, it was announced that property experts in London are predicting dangers for the housing market. London house prices tumbled in March this year with the annualised rate of inflation dropping to minus 0.7%, the biggest drop since 2009 according to official Land Registry figures.
In contrast, prices are rising across the rest of the UK with the overall rate of house price inflation at 4.2%. The Guardian reported that the average house price has risen to £224,000, £9000 higher than it was a year ago.
With house prices outside of London continuing to rise, it is becoming increasingly difficult for people to get on the property ladder. Back in March, The Independent reported how the process for first-time buyers has become more expensive in recent years with research revealing that 69% of people think it is now harder to buy a home. With people finding it so difficult to access the property ladder the increase in private renting makes sense for couples and families that are unable to afford the homes that they need.
The emergence of build-to-rent developments
Build-to-rent developments are being seen as a crucial element of the future residential makeup of the UK. In our report ‘Planning 2020: A new framework for modern Britain’, 87% of housebuilders stated that they anticipated more involvement in build-to-rent development over the next three years in comparison to the previous three.
In Sajid Javid’s Housing White Paper, published in February of last year; it was acknowledged that the proportion of people living in privately rented accommodation has doubled since 2000. Furthermore, home ownership is at its lowest level in 30 years. With house prices on the rise, build-to-rent developments should be seen as a logical consideration for housebuilders.
Build-to-rent is where private residential developments are specifically designed for renters. In some cases, this includes on-site maintenance teams, concierge services and communal areas. They often include the ability to sign up for three-year tenancies, allowing renters to integrate more effectively in the community rather than moving on after 12 months.
Build-to-rent schemes are gaining more traction as they are no longer seen as a solution purely targeted toward single city dwellers or twenty-something couples. Developments are increasingly beginning to be primarily made up of two to four-bedroom family homes. Build-to-rent accommodation is also being considered as an alternative to retirement housing as it has the benefit of having no long-term financial commitments or contentious contract clauses.
Why are build-to-rent developments beneficial to investors?
One of the reasons that housebuilders are beginning to be drawn to build-to-rent developments is that they are a completely different asset class to the traditional build-to-sell residential schemes of the past. Organisations currently contributing funds to build-to-rent schemes are investors such as pension funds that historically would invest in commercial property. These organisations are diversifying their investments, attracted by the long-term, low-interest model of build-to-rent that provides an ongoing income stream.
What are the next steps for build-to-rent developments?
The policy frameworks that are currently in place are designed for the traditional build-to-sell model of development. The viability of build-to-rent developments has been a topic of ongoing debate and is an issue that the Government is now addressing.
The Housing White Paper set out proposals to amend planning policies so that councils are required to plan for more long-term build-to-rent homes. The form of the proposed policies was published back in March 2018 as part of the National Planning Policy Framework and associated Planning Practice Guidance consultation.
The proposed policy supports the provision of affordable housing on build-to-rent schemes being by default in the form of affordable private rent with 20% being generally a suitable benchmark for the level of affordable private rent homes to be provided in any build-to-rent scheme. Affordable rent should be at a level that is at least 20% less than private market rent (inclusive of service charges). When conducting research for our report ‘Planning 2020: A new framework for modern Britain’, housebuilders were asked what the Government could do to support the build-to-rent market. 70% of respondents suggested the measure of assessing build-to-rent properties within affordable housing quotas.
The policy also recommends longer tenancies of over three years to attract families and that these longer tenancies should be secured by planning condition. There would, however, be no obligation on customers to take up the offer of a three year tenancy and there should be an ability to break on one month’s notice after the first six months without a break fee.
What challenges do housebuilders need to be aware of?
While build-to-rent offers benefits to housebuilders, it does not come without its challenges. Considering the infancy of the industry, ensuring the commercial viability is a priority as well as having the skill-set and employees to actually deliver the developments. It is important that time is taken to understand the need for build-to-rent properties in potential locations, resident demographics and local housing stock to identify financial viability. Countries such as the US, Germany and France use build-to-rent as a prevalent housing model and it would be valuable to consult with experts in these locations.
Why are build-to-rent developments an opportunity for the UK?
As seen with the recent London house price tumble, real estate is currently going through a period of change. Alternative developments such as build-to-rent offer housebuilders new opportunities in a changing market as more people move away from buying property. Attractive to both investors, housebuilders and renters alike, this new kind of development could contribute to easing the UK’s housing crisis. Our report ‘Planning 2020: A new framework for modern Britain’ is recommended for housebuilders considering the future of their operations. The report examines build-to-rent in further detail as well as regional devolution, pre-commencement conditions and planning issues.