The delicate balance of ‘build to rent’

Published on Housing, Wealth and Debt

How times change. Twenty five year ago less than one in ten families rented their home from a private landlord; today that figure stands at close to one in five. Renting is no longer the tenure of just the footloose and fancy-free who prize the flexibility that it offers. The private rented sector (PRS) is increasingly a place where families settle down, bring up their children and build a home.

But here’s the rub: the PRS in the UK is not well-suited to this new task. In contrast to many of our continental neighbours and the US, our PRS is highly fragmented and unprofessional. Renting out property is a side-line for most UK landlords: recent research has shown, for example, that over 60 per cent own a single unit while just 7 per cent own five or more. The result? Too often a low quality home, with limited security of tenure, and a high price tag.

We’ve looked before at whether institutional investment could play a role in improving the PRS offer in the UK. In 2012 our analysis showed that ‘build to rent’ was potentially a win-win. It could provide pension funds, insurance companies and the like with an inflation-hedged income stream and the possibility of capital growth. But with a viable return contingent on low tenant turnover, quality accommodation and longer rental contracts are an essential part of the model. The interests of investors and families would happily coincide; someone just needed to take the leap.

It’s good, then, to have seen a flurry of activity in the ‘build to rent’ sector over the last few years. According to the British Property Federation, 12,000 PRS units are owned by institutions in the UK today and a further 66,000 are in the pipeline. While London is leading the way in learning by doing, around half of these homes will be located outside the capital. But it hasn’t been all plain sailing for the infant industry. Most notably, the government’s decision last spring not to exempt institutional investors from the 3 per cent stamp duty surcharge on additional homes was a nasty (if understandable) surprise.

Things might be looking up on the policy front however. Early indicators suggest that in contrast to previous governments the May administration is less interested in the short term subsidising of housing demand and more interested in increasing supply of all tenure types. And after a rocky 2016, the imminent housing White Paper will at the very least provide investors with the policy certainty that they have lacked in recent years. As the ‘build to rent’ sector looks set to pick up welcome pace, however, there are two emerging trends we might do well to note.

First, even a quick look at developer websites shows that the majority of ‘build to rent’ is currently targeted at the higher end of the market. There’s nothing wrong with that of course – these units are responding to a genuine housing need and can release other properties for occupation – but it’s clear the sector is not currently in the business of directly increasing the supply of cheaper housing. Indeed, given the requirement that most new developments contain a proportion of affordable homes is sometimes relaxed for institutional investors, ‘build to rent’ may on occasion be squeezing out cheaper builds.

Second, anecdotal evidence suggests that a large number of ‘build to rent’ developments are dominated by one to two bedroom flats. This isn’t surprising, perhaps, given that smaller units have higher margins and are therefore more attractive to investors. But it does point to a potential mismatch between this new form of supply and the types of private renters – families with children especially – that we all expect a more stable, professional PRS will benefit.

There’s a delicate balance to be struck by the government, then, with respect to ‘build to rent’. On the one hand, some cheerleading and support for early movers cannot go amiss. On the other, as the sector grows, the government would do well to set out a vision for its development that ensures the cheaper and larger properties which those on low to middle incomes so desperately need are also part of the plan. As with all infants, helping them find their feet is key, but setting them off on a sensible path from the get-go is important too.