Pauline Roberts & Joe Sarling
22 Jun 2016
In the first two blog posts in this series I set out the benefits of and barriers to Build to Rent developments. This last post will explore ideas on how we can support the sector to a greater degree in order to maximise its impact and cement its role as a key contributor to solving the housing crisis.In a recent letter to Housing and Planning Minister Brandon Lewis, The Better Renting Campaign has suggested three priority areas which could further help to support the sector:
A set proportion of sizable public land sites suitable for more than 100 units, be designed for long term BTR, with a presumption in favour of planning
Not to levy the stamp duty surcharge for second homes on professional BTR investors, as promised by the Chancellor in December 2015, to help make these developments more viable and attractive to investors.
Provide recognition of Discounted Market Rent (DMR) as a form of affordable housing for BTR schemes.
I agree that the release of some public sector land for BTR housing would significantly help the sector and reduce the competition with build-to–sell housing. I advocate the use of BTR quotas in Local Plans, if based on an objectively assessed need and resulting housing requirement, or as part of a brief for the development of public sector land. All of these measures would help to ensure that BTR housing is reflected in land prices and as such, would help to reduce the viability gap.An exemption in relation to the stamp duty surcharge would help the sector and encourage investment and ultimately housing delivery. However, with investment in the sector reaching £50 billion over the next five years it is no surprise that the Chancellor wants some of this value to be captured, to help fill Government coffers. Whilst the stamp duty surcharge will no doubt impact on viability, it is generally considered that this in itself will not undermine growth in the sector. This was explained by Philip Nell, Fund Director of Vista UK Real Estate Fund, the residential property fund established by Hermes Investment Management and Countryside plc:
Through adept negotiations with developers, we believe that the impact of higher stamp duty on rental properties can be mitigated. This, combined with continuing policy support for PRS property development, greater pressure on smaller-scale landlords and the persistent demand and supply imbalance in the UK rental market, should ensure that investment opportunities in this sector remain compelling.
The call for greater recognition that DMR should qualify as ‘affordable housing’ for BTR developments is critical, as providing traditional social rented accommodation within BTR developments, managed by a Registered Provider, is not a realistic proposition. The BTR model works because the developer is responsible for the management of the entire building: a proportion of units being managed by another organisation is not seen as an acceptable proposition. On the BTR schemes that I am currently involved with, there is acceptance that DMR is a means to ensure that a BTR scheme can offer an ‘affordable housing’ contribution. This is an approach which has been applied on a number of schemes across London, for example M&G/HUB Residential in Ealing, Dolphin Living’s scheme in Westminster and Essential Living’s scheme in Swiss Cottage - it appears already to be the accepted approach in London.Whilst DMR housing will not necessarily provide homes for those residents on a Council’s or social housing provider’s waiting lists, the discount offered will make those units more affordable for those on lower incomes. In some schemes across London, innovative approaches are being taken forward where the discount is linked with income, creating ‘Living Rents’. It is important that the BTR sector is encouraged to explore such models, in the interests of helping to house those on lower incomes and thereby help to retain the capital’s workforce.There is clearly a range of mechanisms which could help overcome the viability issues faced by BTR developers – some which can be done today, some which need greater government support. With the sector set to triple in size by 2020 and the industry knocking on the Government’s door with suggestions of how to unlock its potential, there seems to be a real prospect that BTR could help to ease the housing crisis – but to what degree? Only time will tell but the future is looking very promising indeed for the BTR sector.
Pauline Roberts & Joe Sarling
20 Jun 2016
As I have set out in the first blog post of the series, the Private Rented Sector (PRS) and, in particular, Build to Rent (BTR), is going through somewhat of a renaissance. However, for the sector to fulfil its potential and maximise its contribution to overcoming the housing crisis, we need to overcome the barriers it faces.The fundamental issue facing Build to Rent schemes is viability. At the core of the issue is build-to-sell developers and BTR often compete for the same land for their schemes. However, the returns are very different – the former have large capital returns while the latter receives lower revenue returns. By way of example, the Investment Property Forum (September 2015) reported that the BTR model attracts an annual rate of return of 7.5% compared to the traditional build-to-sell model of 17.5%. Developers typically seek a return on their investment of between 15 and 20% depending on the planning risk, which serves to highlight the challenge faced by the sector.A number of measures have been suggested to try to reduce the viability gap and/or the risk involved in such developments. One suggestion is that BTR should have its own Use Class, to distinguish it from standard residential accommodation so that it could be treated differently – indeed, it is treated as a different asset class by investors so perhaps planning could reflect this. This would mean land could be allocated for this specific category of residential tenure, which would then be reflected in the land price and help to bridge the viability gap with build-to-sell developments.After much debate and a call from the Government for the industry to speak with one voice on this matter, it would appear that the industry is now comfortable with BTR remaining in Class C3 use for the time being. I agree with this approach for now; the introduction of a new Use Class would take time to implement and bed down, and would only serve to introduce delays and uncertainty to a sector that is on a growth trajectory.Helpfully, there is also increasing planning policy support for PRS and BTR developments, which reduces development risk. For example, national Planning Practice Guidance (PPG), the London Plan and increasingly Local Plans, actively encourage the PRS and BTR developments.Further support could be offered through the allocation of sites for BTR and via quotas for BTR development on large sites. This would help to make sites more viable because this would be taken into account in any land transactions. LPAs already have the ability to achieve this through their Local Plans, through Area Action Plans or planning briefs for strategic sites and I expect that we will increasingly see this move towards more BTR local policy and guidance.It is also important that LPAs exercise flexibility when it comes to design standards, in recognition that the BTR model differs from build-to-sell housing. For example, the BTR model is based upon buildings with wide-ranging communal facilities and efficient management arrangements such as property maintenance and cleaning, akin to purpose-built student accommodation or a hotel. This efficiency is increased if there is are a larger number of units per core for example; this design layout also helps developments to foster a sense of community as it will encourage social interaction.As an industry we need to find a way that allows BTR developments to be constructed at higher densities without compromising the standard of living accommodation overall. As mentioned above, it is in the industry’s interests to ensure that the quality of accommodation is good in order to attract tenants. Perhaps there is an opportunity for a distinction to be made between build-to-sell and BTR design standards and for a pragmatic approach to be taken to BTR schemes? After all, a higher density BTR development will be more viable and should be reflected in the rental level sought.There is also concern from the Greater London Authority about the standard of the residential accommodation in the event that the development reverts to build-to-sell - an authority would have a build-to-sell development that was designed as a BTR scheme (i.e. possibly with more units per core and more double-loaded corridors than recommended in the London Plan).To overcome their concern, LPAs are increasingly seeking longer covenants to provide assurances that BTR developments will remain rental products for the long term. Whilst this approach is understandable, it is important to recognise that the sector is only just starting to attract significant investment and investors require an exit strategy in the event of an economic downturn. It is therefore important that LPAs do not expect unreasonably lengthy covenant terms, which could deter investors at the outset. Pragmatism and flexibility is required and each scheme must be considered on a case-by-case basis to ensure that developments work for both investors and local authorities alike.The key barrier to BTR developments is viability, particularly as they compete for land with higher-value build-to-sell developers. There are currently ways in which local authorities can overcome some of the contributing issues through flexibility and pragmatism but in some areas they need a slight change in emphasis in order to take full advantage of a growing sector.