The Boodle Hatfield Private Rented Sector (PRS) Group hosted a round table breakfast discussion on 4 February. We were delighted to welcome a panel of twelve guests from within the residential property industry including representatives from Grosvenor, Dorrington, Westrock, Greystar, Get Living London, Deloitte and Gerald Eve. The discussion was chaired by Alex Notay of Alex Notay Limited.
This discussion was held at an interesting point in time; since then we have seen the Budget and the Mayoral Election; both of which are likely to have an impact on the success of the Build to Rent industry.
Build to Rent - the way forward?
The discussion in February explored both issues facing the private rented sector and future market expectations.
Notwithstanding the Government's current emphasis on home ownership, the panel felt strongly that Build-to-Rent is part of the solution to the current housing crisis. However, the pricing of the land in the UK remains an issue, particularly in view of the usual cost of planning obligations, making it hard for Build to Rent developers to match the prices paid by Build to Sell developers.
Financial viability of Build to Rent developments could be improved by either the introduction of new use class or the use of rental planning covenants, but there remains a degree of dissension in the industry as to which is the better option. The Housing Minister has now asked the industry to speak with one voice, so clarity is needed.
In general the panel felt that the rental covenant was the stronger option, as this can be applied flexibly and provides an exit strategy for investors through sales of units on the open market at the end of the covenant term. An example was given of a recent development in Westminster where a fixed sum was payable in the event of the developer wishing to sell one or more flats before the expiry of the covenant.
Given past experience of the adverse effect of rent controls and security of tenure on the private rental market, many of the guests felt that an exit strategy was key to encouraging investment in the sector. However, at the same time certainty can be increased for both landlords and tenants by offering longer tenancies with fixed or RPI based rent increases.
Management and Amenities
In the US the rental or "multi family" market is now firmly established and many of the rental blocks incorporate a variety of amenities, designed to attract tenants. However, this market has taken many years to evolve and the panel was clear that what works for the US will not necessarily work in the UK.
Even with Central London based developments, affordability and space remain key. Rather than offering extensive amenities and loading the rents, it is often better to be selective and offer only those services which the prospective tenants will really want or need. For example, if there is already a gym in the vicinity, it may be preferable to try to negotiate a favourable deal with that operator rather than having to go to the expense of running one within the development, which may hardly be used.
It is clear that effective management is crucial to the success of a rental development and for this reason the majority of the panel at the roundtable preferred to manage rental blocks internally, rather than outsourcing to external agents. If the owner and the manager are the same people, they have more pride in the block and take more care - one guest commenting that "no one cares like the owner"! Problems can be sorted out more quickly and response times shortened.
In the age of social media especially, customer satisfaction is key; tenants can easily leave a bad review in a public forum which is then immediately seen by hundreds of prospective tenants. If possible, the panel was of the view that management should be involved from the construction stage long before the building opens to residents, although this is not always cost effective.
Members of the roundtable panel were agreed that Build to Rent developments can be a very useful tool for placemaking..Units can be let far more quickly than units could be sold, meaning an almost instant population and sense of vibrancy. With a large enough site, amenities can be assessed on a neighbourhood level; indeed, many of the London estates have put this into action very successfully.
Despite all the talk in the press of 'Generation Rent', it was interesting to hear from panel members who have existing rental developments that the tenant demographic remains diverse; ranging from working professionals to families. Although many renters are priced out of the sales market, others prioritise flexibility and the ability to change location easily. Perhaps we are heading towards the US 'multi family' model after all….!
SDLT and the effects of the recent budget
Following the roundtable and whilst many of the attendees (including several of our own partners) were enjoying a rather rainy MIPIM, George Osborne announced further changes to the Stamp Duty Land Tax (SDLT) regime which at first sight seem to pose a further threat to investment in the private rented sector.
Whilst the "buy to let" market will no doubt be hit hard by the additional 3% on second properties, the effect on the Build to Rent industry may not be so dramatic. When purchasing multiple dwellings as part of one transaction, it is possible to make use of Multiple Dwellings Relief (which fixes the rate of SDLT by reference to the average consideration per dwelling). The additional 3% will make this relief less attractive going forward.
However, where there is a single transaction involving the acquisition of 6 or more dwellings, the non-residential SDLT rates are applicable. The recent budget has therefore increased the overall SDLT bill for those wishing to invest in most Build to Rent developments (the top non-residential rate having increased to 5% for any part of the price above £250,000, meaning that SDLT on purchases for more than £1,050,000 has gone up). Yet the increase is not likely to be as substantial as that faced by standard "buy to let" landlords buying properties on a piecemeal basis. For example, the SDLT on the purchase of a block of (more than 6) flats for a total price of £10 million will now be £487,500, as compared to £400,000 under the previous regime. By contrast, a purchase of just one flat of the same value by a buy to let individual investor would have attracted an SDLT bill of £1,113,750 before 31 March 2016. This figure has increased to £1,413,750 on 1 April 2016.
As long as the other threats to the viability of Build to Rent developments can be overcome, we cannot see the additional SDLT becoming a major obstacle to the success of the industry, although it may perhaps lend some weight to the price negotiations!
A New Mayor for London
In view of the current housing crisis, particularly in London, housing was always going to be high on the priorities of the new Mayor and Sadiq Khan's manifesto claiming that "this election is a referendum on housing". Whilst many of his proposals are aimed at ways of helping London residents to gain a foot on the property ladder, he has committed to bring forward more land owned by public bodies, as well as promising a minimum of 80,000 new homes a year, both of which - if achieved - should help to achieve more viable rental developments as well as affordable homes for sale.
Another interesting proposal by the new Mayor is a London wide not for profit lettings agency to promote longer-term, stable tenancies across London. At our roundtable event, the panel was generally of the view that tenants favour flexibility above stability when renting, preferring tenancies of 12 to 18 months, but it is possible that the promotion of longer-term tenancies may encourage others into the rental market -retired people who decide to sell up, release capital and move into a more central location perhaps.
There has also been some talk of rent control, a phrase which will strike fear into most Build to Rent developers. The effect of the Rent Acts in the 1970s and 1980s on the rental market was disastrous and it has taken many years to recover. However, not all rent control proposals need be so drastic. Options like the Scottish proposals - allowing local authorities to create zones where rent increases are limited - or the German model - where rent increases during a (usually longer term) tenancy are restricted, but the rent can be re-set to market levels at the start of a new tenancy - may help to restore tenant confidence and promote stability.
The level of enthusiasm for the private rented sector in England Wales, both actual and perceived, is encouraging. However, the price of land, together with the usual planning obligations, means that viability remains an issue and both investors and funders retain a degree of nervousness about the sector.
Planning flexibility remains crucial to the success of Build to Rent schemes and members of the British Property Federation are in the midst of a programme of meetings with local authorities to discuss alternative ways of dealing with rental schemes.
The increase of SDLT rates will be another factor for parties investing in the sector to consider when analysing potential profits, although nervous investors should be encouraged to look at things holistically and realise the advantage of long term income streams, rather than focussing on capital values.
Our roundtable meeting concluded with a very positive prediction by one guest that "the next four years will be a defining period of the establishment of the PRS as an asset class." Since then, the housing promises made by Sadiq Khan have added an interesting background to the housing crisis in London and only time will tell how these proposals take shape, particularly in the rental market. An exciting prospect awaits us.