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Build to let

publication date: Apr 23, 2008
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A report published by GLA Economics and the British Property Federation calls for the creation of a branddriven home rental market, similar the USA and Germany.

It recommends that affordable home levies on developments built specifically for rent to should be cut, to make development more viable for large institutions. Currently, residential letting is less attractive to large investors because it means committing money for longer and getting less return than with offices or retail.

The report, written by Savills, outlines how new planning guidance rental-only homes could lower house prices, increase housing investment and deliver new homes from branded rental providers. The aim is to encourage funding to develop a professional rented sector offering branded rented accommodation including decent family homes and longterm tenancies, all professional managed like an office block.

‘Build to let’ could create a separate residential market for rental, on the premise that, at present, housing is developed solely for ownership. While homes may be rented out, their value and that of the land they are on, is determined by how much they would fetch in the ownership market. A planning definition only allowing development for rent would mean that such properties would be valued more for their rental income and would be attractive to institutional investors. To make overall returns competitive there would have to be some prospect of accessing capital gains from selling the property, but the property would be valued predominantly for its income stream. The restriction to ‘rental-only’ could last for 10 years.

The other benefit of treating largescale rented developments differently is that they could benefit from lower development levies that require developers to build a certain amount of affordable housing with each development. Because the returns from rental are lower and the investor is tying up capital for a period of time, affordable housing requirements are currently a major barrier to a build-tolet sector.

Reducing the requirements could ultimately increase the overall level of affordable housing. Combined with the added supply of rented housing (itself an ‘affordable’ solution), this would be a major benefit for Londoners and could be applied across the whole country.

Changing the planning definition of rented housing is one of several key recommendations in this research which investigates ways of increasing private institutional investment to improve London’s housing supply. Greater investment is needed to help alleviate London’s housing shortage, so an understanding of the steps required to encourage it is vital.

Ian Fletcher, BPF residential director, said: “Statistics bear out why there is such tremendous demand for rental property to occupy. Nationally, the cost of private renting is typically at least 30 per cent cheaper than buying an equivalent property. The private rented sector is therefore delivering ‘affordable’ housing for those unable to access owner occupation or social renting, with 70 per cent of private tenants unable to buy their own home. It is therefore perhaps not surprising that more households have been housed in the private rented sector this millennium than in social renting or owner-occupation.”

Bridget Rosewell, consultant chief economist, GLA Economics said: “The UK market has become very restricted, limiting access to housing to only a few ways. Encouraging new forms of investment is important to increasing supply and choice in the marketplace. This research helps identify how greater diversity of supply and faster building can be encouraged to meet the needs of London residents.”

Jacqui Daly, director at Savills, who conducted the research, said: “A build to let model would allow more operators to grow and become branded providers of rented housing. The build to let product would increase their scale and market dominance, which would have the added advantage of increasing competition between small and large landlords, which would ultimately forcing bad ones out of the sector. It would also increase the supply of long term rented housing and offer a customer focused service to occupiers. As they grow in size, there will be more scope for branded landlords to attract further investment and launch on the stock market.”

Build to Let -ARLA’s view

ARLA has expressed a cautious welcome to the BPF move to speed up the supply of rented residential property through its plan for Build to Let.

However, institutional finance was envisaged as a method of expansion of the Private Rented Sector as long ago as the early 1990s when the PRS was expanding as a result of the 1988 Housing Act. It was also the time of the property crash with a number of “reluctant landlords” operating due to the high interest rates and their negative equity.

Over the years there have been several occasions where institutional finance has flirted with the PRS. In the early 1990s the Business Expansion Scheme was used by banks and building societies to achieve income from the property repossessed or developments put into liquidation or receivership. As soon as the property market improved these institutions took their profits and ran, generally before the BES regime came to an end.

This started to create a shortfall of property within the PRS and ARLA promoted several ideas to Government at that time; Housing Investment Trusts, which were investigated, proposed and fell at the last hurdle, being an example. As a result ARLA set about convincing lenders to allow the market they knew best to help supply the properties required and Buy to Let was initiated in 1996. This has had a considerable impact on the PRS and assisted in the PRS now supplying 12% of the housing stock within the UK.

However the pace of this was limited and gradual as it required investors to change their investment strategy away from the Stock Market and pension plans. Various factors assisted this, including the Stock Markets losing the confidence of private investors, the Government’s intervention in the Tax Regime of the pension industry and pension disasters such as Equitable Life. Even then, Government still found itself unwilling to assist the development of the PRS.

Since then we have had REITs which failed to inspire the institutional investor. The supply of property has, however, continued to grow and is envisaged to do so, albeit at a rate slower than current demand. Part of the problem that has not been addressed by this BPF proposal is the requirement for the correct type of housing being built in the correct location. We have, at present, an oversupply of two bed modern flats in several cities which investors, often looking for quick returns, purchased without researching the demand. This abetted developers looking to get as many units as is possible through planning for any given site without consideration of what people actually want.

There is a danger that this new promotion may also fall into that trap and even, potentially, the one occupied by local authorities in earlier times, by creating rented ghettos. A mixed development is always socially the most acceptable to all classes of tenure and it also avoids the major pitfall for the owner occupier on the Build to Let development, that of the investor institution requiring /wishing to sell its interest all at the one time, probably when the NHBC warranty is about to expire and reducing the value of all properties on the development.

ARLA does believe that all avenues need to be explored to speed up the supply of property for the PRS. However, the current proposal probably raises as many queries as the number of problems it would solve.


Nick Jopling, executive director for residential at CBRE, said: “It is clear that joined up effort is required across the government and private sector if we are to milk the full benefits of the professional rented sector. We have to initiate a form of reliable tenure that will act as an important stepping stone to those looking to enter the first time buyers’ market in the future. The professional rented sector is provided better in countries such as the USA and Netherlands, but these proposals, if adopted, could usher in numerous improvements to the provision of housing in the UK.”

Liam Bailey, head of residential research at Knight Frank, said: “The goal of a Professional Rented Sector has been a long time coming, and despite some success stories over recent years the reality is that the rented sector in the UK is dominated by the small private landlord. The benefits of a branded professional rented sector should be improved repair and maintenance and hopefully improved services to tenants. There is no doubt that the ‘build to let’ concept should help in a shift to greater corporate involvement in this sector.”

Simon Scott, head of residential investment at Savills, said: “No one seems to have recognised the value that institutional investment would have for developers and their financiers. We know that to stimulate development and urban renewal both parties require an element to be pre-sold. Build to let that is pre-sold to investors would satisfy this and allow a developer to focus much more on bespoke design. This would be preferable to a ‘one size fits all approach’, which is more common in the current market despite the demand from renters and buy to let investors.”

Executive Chairman of the Home Builders Federation Stewart Baseley says: “A thriving private-rented sector is in the interests of both consumers and developers. However, using the planning system to distort the land market, and expecting local planning authorities to secondguess the demand for different housing tenures, is not the right approach.

“If the planning system is used to restrict use of some of the inadequate existing supply of land for one particular tenure, this does nothing to address the overall problems of supply and affordability. It is merely robbing Peter to pay Paul, increasing the supply of private rented housing at the expense of a reduced supply of housing for owner occupiers.

“HBF believes that the use of fiscal incentives would be a far more effective method of promoting increased supply of private-rental housing.”