The number of large scale Build to Rent developments is definitely on the increase, particularly in the major urban centres, despite initial concerns over financial viability. What are the attractions for developers and investors? We discuss 10 key benefits of Build to Rent.
1. A solution to the housing shortage
The UK is in the midst of a "housing crisis", with demand for homes far exceeding supply. Despite the fact that over 80%1 of UK citizens claim to aspire to home ownership, a large proportion simply cannot afford to make that step, particularly in London where a combination of lack of supply and high demand has seen prices increase exponentially. Whilst not the only solution, Build to Rent has a key role to play in providing quality, affordable homes to those that cannot yet make it on to the housing ladder.
2. A growing market
Over the past twenty years the number of private renters has grown from 4 million to 11 million, meaning that 1 in 5 people are now renting. Renting has become mainstream, rather than something reserve for students and those requiring a temporary stop gap. Aside from affordability, studies have shown that many rent by choice; choosing flexibility and a central location over a large mortgage commitment and a long commute.
3. Faster absorption rates
Absorption rates for Build to Rent developments can be up to 2.5 times faster than those built for sale, with some London schemes achieving an average letting rate of 60 units per month. Rental developments are therefore an excellent way of accelerating delivery of large numbers of units at a price suited to local need.
4. Government schemes
The Government have demonstrated their commitment to the private rented sector by a series of financial incentives, the latest of which is the Private Rented Sector Housing Guarantee Scheme. The Guarantee Scheme supports new-build rental projects with a minimum value of £10m, a maximum loan to value of 80/20 and a loan period of up to 30 years, although monies will not be released until practical completion.
5. Steady income whilst retaining capital growth
It is now more generally accepted that traditional valuation models are not appropriate for Build to Rent developments, which should be valued on their own merits; by analysing the long term income potential. Whilst net profit will always depend on the level of operating costs, it is unusual for rents to go down over time, particularly in urban areas and it should be possible to predict annual cash flow with some certainty.
6. Place-making, quickly
With much faster occupation rates, creating a critical mass of residents - a sense of community - can be achieved much more quickly with Build to Rent developments than with Build to Sell, where sales are usually phased. Retail and leisure facilities can be supported at an earlier stage and greater use of both these and local transport links help to increase the vibrancy of the area and its appeal to new residents and customers, whilst also providing a source of local employment.
7. Long term quality
Any developer or investor looking to retain the capital value in its asset whilst also minimising operating costs will look to create a robust building which is both fit for purpose and durable. To be financially successful therefore, Build to Rent developments are likely to be designed to meet the tests of time, focussing on the "whole life" cost of the asset rather than simply the build cost. By offering a quality product, Build to Rent developers can improve both their reputation and that of the renting model.
8. Economies of Scale
Good quality, efficient management is key in a Build to Rent development. With a constantly changing resident population, reputation is everything, particularly in the era of social media. With larger blocks, spreading the costs across more units is likely to reduce the proportionate cost of management without limiting the quality. Indeed many of the larger Build to Rent providers are finding it beneficial to keep the management in house, where they can control both the cost and the service more effectively.
9. Those added extras
Amenities can be a good way for a developer to increase its income, by offering services (such as laundry or bike repair) to residents for an additional cost. However, the cost of other amenities, such as a gym, will have to be factored into the rent, so much will depend on what is already in the local area. It can be more cost effective to negotiate a discount with local businesses, which can be offered to residents at no cost to the landlord and allow flexibility if circumstances change.
10. Freehold protection
Where flats are sold on long leases, the leaseholders in a block often have the statutory right to club together and purchase the freehold, or collectively to take over the management of the block. In addition, individual flat owners have the statutory right to extend their leases by an additional 90 years, as many times as they like. In a Build to Rent development the tenants will not benefit from any of these rights, meaning that the landlord will retain control over his investment as well as the ability to obtain vacant possession and/or redevelop the flats in the future.