Against a backdrop of austerity and a nationwide housing crisis, government policy has seen the creation of local authority housing arms become established practice as councils are forced to take charge of the delivery of homes and boost their revenue streams. Through a range of development models, including partnerships with the private sector, local authorities have found innovative ways of delivering much needed housing.
Build-to-rent (BTR), as well as other affordable housing such as shared ownership and discounted market rent (DMR), is becoming increasingly popular with local authorities, as a way of delivering high quality homes quickly and responsibly. While good value properties for private sale are necessary, versatile models and tenures such as BTR have a vital role to play in addressing housing supply.
BTR homes – often referred to as part of the Professional Rented Sector (PRS) – are purpose-built at scale with the intention of being managed and rented long term, boosting choice and quality. According to data from the British Property Foundation, there are now 117,893 BTR homes complete, under construction and in planning across the UK.
Councils need to identify their priorities at the outset of any new development – whether strategic, economic, cultural or social. BTR schemes in particular can be tailored to address specific local needs. With under-funding and skill shortages widespread among local authorities, BTR crucially allows for the swift delivery of homes, while simultaneously allowing councils to meet their social objectives; bringing benefits to their communities and ultimately enriching the lives of residents.
Housing for the many
A concern for councils getting into BTR has previously been how their social commitments and community interests would be affected. The now well-established option is allowing affordable housing to be offered at DMR, which is rent set at a maximum of 80 per cent of local market rent, although these levels can vary. In London, the Greater London Authority (GLA) has endorsed DMR as a specific form of affordable housing for the build-to-rent sector. It can be fully integrated into a BTR development, unlike traditional forms of affordable housing, allowing schemes to be tenure-blind to help create inclusive and mixed communities.
In this way, BTR schemes can provide new, high quality housing for all, with amenities targeted at addressing social and community issues, while fostering community engagement and support. For example, build-to-rent operator, Fizzy Living, has encouraged pet-friendly homes with regular social events for dog owners and their pooches as a way to tackle loneliness.
Local authorities should embrace the fact that the advantages of BTR are not confined to profit margins and use this emerging housing option to build real, sustainable communities which will continue to serve residents long after construction is finished.
Not just hipster housing
While many BTR developments are lauded as having ping-pong tables and independent cafés as part of their offer, this stereotype is not – and should not – be the norm. As the BTR market has matured and demand has continued to rise, so has the variety of product on offer which now caters to people across all demographics and life stages.
A recent study by BTR management company, PRSim shows that 29 per cent of people living in rented accommodation are families. A further 23 per cent are over 45, evidencing that the desire to rent is not restricted to young professionals using it as a stepping stone to buying their first home. What’s more, PRSim identified that far from the hipster wish list which many might have expected, themost desirable elements in BTR schemes are pets being allowed, high-speed internet and allocated parking spaces.
As BTR broadens its spectrum and target markets, it is shedding its association with gimmicks and marketing solely for millennials, instead building a reputation for providing high quality, good value housing for ordinary people and families. This is leading to a significant uplift in institutional investment in the sector as the advantages for investors are becoming increasingly apparent.
Councils can benefit from the instant placemaking that BTR schemes can bring to a local area. This aspect is also hugely attractive for investors, helping to establish revenue streams quickly. BTR schemes aim to see buildings fully occupied as quickly as possible, as opposed to for-sale developments which are delivered in phases and thus often spread risk over several years. It means a scheme is not a constant building site – a significant bonus when attracting prospective renters and building an immediate revenue stream for investors.
BTR projects also minimise investment lag by using modern methods of construction, such as modular units, which reduce risk in terms of cost and time. These streamlined methods mean there are more and varied options for development finance in future projects. With private rent the fastest growing tenure, particularly in London, there is now appetite for investment through a number of avenues.
Show me the money
There is a long-held assumption that public sector borrowing (PSB) is the cheapest way to raise development finance. This is strictly true but often short-sighted. Public sector finance has conditions placed on it, which restricts how it can be used and managed. In BTR schemes, which are dependent on their flexibility, this can often prove costlier than seeking private investment.
As a result, institutional investment is often equal to PSB and is much more flexible and able to meet local authorities’ objectives. Councils have more freedom to build the developments which are needed in their areas and BTR is attractive to these investors as it provides long-term, stable returns.
For investors, BTR is still a relatively unknown quantity with yield data thin on the ground in these nascent stages. Institutional investors, such as pension funds, will often want councils to commit to a local authority covenant to guarantee a level of return. Generally speaking, councils should back their schemes to deliver commercial returns without this sort of undertaking. However, a covenant could be justified to help deliver more and varied housing choice in otherwise suitable areas where the risk is considered too high for investment.
As BTR schemes complete and buildings start to become occupied, evidence-based metrics and data will become more readily available which will reassure and encourage more engagement with BTR around the country. A secondary market for BTR investors is just beginning, and as these secondary sales continue, yield data will become more widely available which will make investment by councils and institutional investors more transparent and comparable to other council investments. BTR is already well underway in London, but with land values much lower outside the capital, it is in the regions that more attractive yields may be found. Once the first generation of developments are completed and occupied, maximising BTR and using it to satisfy their housing objectives will only become easier for councils.
Looking to the future
There is a housing shortage, of that there is no doubt. A change in attitudes and innovation are the only way to remedy it. There is a lingering preoccupation in the UK with homeowning and the rental market is still primarily seen as a stepping stone to buying. However, with BTR schemes offering security through long-term tenancies, there is no reason why renting shouldn’t become part of the norm and an acceptable life choice – as it is across much of Europe and the US.
With house prices rising and people increasingly struggling to get on the property ladder, BTR has a role to play, both to help solve the housing crisis and to raise standards across the residential sector. Local authorities, through their development and housing investment arms, are now starting to recognise this, and by broadening awareness and reassuring both tenants and investors, they can ensure that BTR continues to work in their interest and that of their communities.
James Duncan is head of the PRS team at Winckworth Sherwood