Planning matters

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.