The UK is finally embracing the opportunities of the build to rent sector in a bid to ease the widespread housing crisis. Norman Hayden provides a progress report.
With a rapidly-growing population and people living longer, the pressure on housing in Britain has become immense, with demand far outstripping supply.
Overall, the current market value of the rental market is £1.29tn – up 55 per cent over the past five years. But this country needs to build 250,000 homes a year to satisfy need, with London alone under former Mayor Boris Johnson setting a target of building 42,000 homes each year.
This is a very tall order – witnessed by the fact that two years ago the number of new units delivered stood at 112,370. To meet the housing shortfall, deepened by the ever-growing cost of buying a first home, our rented properties are seen to have a vital role to play with 21 per cent of households currently rented.
Acknowledging this, in 2012 the Government established the Build to Rent (BTR) Fund aimed at providing £200m to build a bigger and better private rented sector. Indeed, 5,000 BTR units a year have been targeted to meet London’s needs. The scheme was launched as part of a series of government initiatives to increase the supply of high-quality homes available for market rent in the private sector.
The BTR Fund is a fully recoverable commercial investment. The investment enables the Government to share risk or to provide finance, enabling schemes to be delivered. The fund offers finance on a commercial basis, with returns to Government being realised upon refinancing or sale of a developer’s interest to an institutional investor within one to two years of completing the scheme.
At the same time, it is hoped that by encouraging institutional investment into the sector, additional housing supply would be created to meet local need.
The BTR Fund is sometimes confused with the Private Rented Sector (PRS) Housing Guarantee. BTR assists with the development phase, while the PRS assists with the long-term holding of property once construction is completed. In PRS, the Government’s investment comes in the form of a loan, and is available to cover up to 50 per cent of eligible development costs.
How the scheme works
BTR is a model that is new to the UK, but it has been in the US for nearly 20 years and almost as long in Europe. In the UK version, which most closely resembles the US model, homes are designed and built specifically for renting – catering for the mainstream market. Some 51 per cent of private renters are under 35 years of age and 54 per cent have no dependents, and so are unlikely to get social housing.
BTR has features which distinguishes it from the rest of private renting. Traditionally, the rental market provides a ‘for sale’ product, whether it is a room, apartment or house. The building design and general arrangements are therefore geared to multiple ownership in a single location.
By contrast, the BTR model is for long-term income from rent. To start with, the buildings display a greater equality of design. For example, every bedroom has an ensuite bathroom (see the floorplan diagrams).
The general environment – such as maintenance of the common areas – is also key to the attractiveness of the social side of the building as statistics show that lease renewal is often based on friendships with other renters.
So, investors seek to keep their buildings fully occupied with satisfied tenants. This can be done through offering longer tenancies and other flexibilities such as personalising the home, good onsite amenities and convenient transport links for easy commuting.
Integration
Blocks of flats in private ownership usually suffer from patchwork management arrangements. With BTR, everything is integrated, with one manager for the whole building. Management provides all services in generally looking after the overall asset. The building’s staff comes from both the housing and the hospitality sector, in recognition that it is a service industry.
Brendan Geraghty, director of Geraghty Taylor Architects, has put together a BTR model. Among its key features is the idea of an integrated business model. This is made up of business objectives, customer service, operational management, design, facilities management and revenue targets. In turn, all these are aimed at building a brand.
In terms of revenue, BTR offers a rental model with income from rent and service. PRS, on the other hand, has a rental model sometimes including service revenue, and, crucially, with an option to sell. In addition, BTR has a bespoke design based on its business model, while the look of PRS buildings reflect the fact that they will ultimately be sold.
Finally, the occupier experience. Geraghty sees BTR catering for a ‘demand’ market, having a relationship culture and where the occupants are viewed as customers. In contrast, PRS has a ‘supply’ market bias, centred on transactions and where occupants are tenants.
Who is investing?
Ultimately, many investors are seeking to invest at scale and offer consistent standards across different locations so that they can develop into brands that their customers trust and stick with. As long-term investors, BTR providers’ only interest is in creating places that ‘thrive’. Their investments will gain or lose value depending on their wider environment.
What sort of start has BTR made? So far, 6,000 units have been built, with 12,000 under construction and 20,000 in the pipeline. Renters tend to make more use of public transport and BTR developments are often therefore delivered close to transport and other infrastructure, with a focus on brownfield development and supporting activity in town and city centres.
Last January, Legal & General Capital launched a BTR partnership with a Dutch pension fund manager to invest £600m in providing 3,000 homes for rent in the UK. The sector’s investment is also bringing new constructors into UK housebuilding – for example Bouygues, one of France’s largest companies. Meanwhile, several local authority pension schemes are investing in BTR, or are contemplating doing so, because it is delivering affordable homes for key workers and other important groups that are critical to their local economies.
Some of the biggest and best housing associations are also delivering and managing BTR, working with UK and overseas institutional investors. There are various motivations for them. For some, their market-rented homes are helping to cross-subsidise the delivery of more social housing.
What is the future for BTR?
Demand for housing it seems will only grow with generations of people forced to rent. Some estimates see BTR being worth £50bn by 2020 and potentially accounting for 20 per cent of residential design.
It appears that demand for rental housing is not only being driven by an inability to buy, but also by the fact that Millennials are more attuned than previous generations to the idea of owning fewer things.
With BTR properties let faster than homes are usually sold, architects will have to design in larger phases allowing building to take place more quickly. Other design considerations include how to look after the envelope of the building, make the internal specification more robust, and put greater focus on the facilities provided, which can include business centres, concierge services and integrated cafes.
Overall, though, the attraction of BTR for architects is working for people who have a long-term view of residential design. Despite uncertainties in the UK economy and the challenges it presents, Brendan Geraghty remains optimistic about BTR.
“It’s early days in the UK and we are searching for our own version. We have some way to go before it reaches the maturity of the US market.”
He continues:
“For architects, it’s a huge opportunity to look at standardising the building. For clients, it’s a huge opportunity to save money and take control of the supply chain. For renters, the flexibility of BTR is one of its core strengths, which will appeal especially to Millennials.”