Build to Rent developments are increasingly seen as one of the answers to the housing crisis, but financial viability remains a concern for many developers and funders. We consider some of the ways planning authorities can ease the burden of planning obligations whilst also providing certainty for the future.

The private rented sector is now the second largest housing tenure in England, accounting for one in five homes, having succeeded social housing for the first time since the 1960s. In particular, large scale purpose-built ‘Build to Rent’ developments are increasingly touted as one of the potential solutions to the current housing crisis. These rental blocks are likely to prove attractive to the younger generation (often referred to as "Generation Rent"), many of whom are priced out of the housing market, as they offer good quality but flexible accommodation, as well as a ready made community.

However, financial viability remains a concern for some developers and investors; Build to Rent schemes generate a lower rate of return than the traditional build to sell model, with tight profit margins based on income rather than capital release. Minimising unpredictable costs such as planning obligations can prove key to a development's financial success.

Many local planning authorities do recognise the benefits of Build to Rent schemes; from a local point of view, they can assist regeneration and place-making, whilst also delivering substantial numbers of homes quickly and stimulating employment. Yet if local authorities are to be persuaded to reduce planning obligations for Build to Rent, they will understandably be concerned to ensure that the rental use is maintained.

Two possible solutions

Discussion within the Build to Rent industry has focussed on two possible planning solutions; the creation of a new use class for private rented blocks and the use of rental covenants. The term 'rental covenant' in this context refers to a planning condition imposed by the local authority, requiring the units to be used only for short term rentals (and therefore prohibiting sale of the individual units) within a defined period.

Would a new Use Class be useful?

Proponents of a new Build to Rent use class cite student accommodation as an example of how long term planning constraints can attract activity and investment into an area, whilst at the same time providing local authorities with sufficient comfort for the future.

A new use class would certainly demonstrate that the government is serious about encouraging Build to Rent, in the wake of its ongoing home ownership initiatives. Furthermore, it would leave local authorities free to tailor planning conditions to the proposed rental scheme, in the knowledge that none of the units can be sold without a further planning permission and give investors certainty about the future and the level of income expected.

Yet in a nascent market like Build to Rent, many believe that a new use class would be a step too far. There is no apparent shortage of developers and investors keen to test the Build to Rent market, but the concept largely remains an unknown (and untested) quantity in England. Flexibility therefore remains central to the overall risk profile.

Rental covenants - a flexible friend?

Set against this background, rental covenants hold many advantages. They are available for use now and require no new legislation. Indeed a number of Build to Rent developments, have already been approved on the basis of a rental covenant. Details of the covenant can also be varied between individual sites; factors such as the length of the required rental commitment and the proportion of market rent versus affordable/discounted rents will differ depending on the location and the community involved.

If a developer wants more flexibility, a local authority may agree to financial clawbacks, allowing some or all of the units to be sold off within the covenant period on payment of a calculable, index linked sum per unit sold. For investors, a rental covenant provides a get out clause; if the rental market has a downturn, or becomes less attractive following a legislative change, they will have a chance to recoup their investment by selling the units once the covenant has expired.

As examples of successful Build to Rent schemes increase, we can only hope that more developers, investors and local authorities will be prepared to take the plunge and work together to achieve the perfect planning solution.

As we go to press, we hear that Supplementary Planning Guidance is due to be released next week providing an official direction that rental schemes in London need not have the same affordable housing requirements as Build to Sell and that discounted market rent can be used for all the affordable units, keeping them in the owner's control. This move has been welcomed by the industry and it is hoped that a wave of new investment in the sector will occur as a result.