Property market analysis: Why Build to Rent is booming in influence

Property market analysis: Why Build to Rent is booming in influence

With the private rental sector booming, online estate agents Tepilo analyse the ever-growing influence of Build to Rent.

Build to Rent, like Help to Buy, was one of the flagship policies introduced by the Coalition government led by David Cameron and George Osborne.

 

But what exactly is it and why is it playing such an increasingly important role in the private rented sector?

 

First implemented in 2012, it's a scheme which encourages institutional investors (helped by government funding) to invest in new and quality rental homes for the rental sector. In recent years, it has become an increasingly lucrative market as the number of renters has risen and there's been a shift by the government away from home ownership towards incentivising people to rent for the long-term.

 

In the case of Build to Rent, the developer doesn't sell off the homes in the new development to owner occupiers or buy-to-let landlords. Instead it keeps hold of the properties to let them itself. It has particular appeal to institutional investors – such as pension funds, charities and insurers – who prefer a regular return over time rather than a one-off cash boom. Rather than construction costs being recovered by initial sales, they are recouped over time in the form of rents.

 

Build to Rent properties are also characterised by the high finishes and communal areas they offer, as well as free Wi-Fi and security of tenure. Designed with tenants in mind, developments offer either a communal, Continental-style vibe or a high-end hotel one.

 

Some have on-site maintenance teams and a concierge service, while others have gyms, games rooms, cinemas and private dining suites. High-quality, 21st-century living is the aim, targeted mostly at young professionals who want a better type of rental property.

 

There are no extra service charges, and annual rent increases are often agreed in advance, pegged to inflation. In most cases tenancies of up to three years are provided, to help provide tenants with security and to ensure people put down roots in a community rather than only staying in one place for six months at a time.

 

The numbers, too, are certainly impressive, and highlight how emerging this marketplace is. In 2012 the government set up a £1 billion Build to Rent fund to invest in the scheme. As of last year, around £500m of that fund had been allocated.

 

Currently, there are more than 69,000 Build to Rent units in the UK that have either been completed or are in planning. Breaking this down further, there are more than 13,000 units which have been completed, over 16,000 currently being constructed and over 40,000 which have been granted planning permission and are now in the development pipeline.

 

London, as you might expect, dominates this sector, with more than 38,000 units either completed, under construction or in the planning stages. Just over 15,000 have either been completed or are under construction, but the majority (more than 23,000) are still in planning.

 

By contrast, there are 31,000 units throughout the rest of the UK, with more than 4,000 already completed, around 10,000 units currently being constructed and more than 16,000 in the development stages.

 

It's not just the capital where Build to Rent schemes are springing up, other major cities such as Leeds, Sheffield, Edinburgh, Birmingham and Norwich are also getting in on the act. The lion's share, however, are in and around London.

 

Build to Rent is booming at a time when demand for rental housing is higher than ever. And only set to get higher still. While buy-to-let landlords and investors have been hit by stamp duty changes and restrictions on mortgage interest tax relief, institutional, large-scale investors have started to see the potential and long-term rewards of the PRS and have poured in money accordingly.

 

Large city firms such as Legal & General, Hermes and M & G have started to invest heavily in Build to Rent, with Legal & General providing sites in Salford, Bristol, Bath, Leeds and Walthamstow. What's more, its total investment capability for the sector is estimated to be circa £1 billionn.

 

Build to Rent is being taken very seriously by big pension and insurance firms, with most committing to three-year tenancies to give tenants added security.

 

Purpose-built flats are appearing across London, in places that are popular among young professionals such as Archway and Bethnal Green. A partnership between UK housebuilder Telford Homes and US residential landlord Greystar was also recently announced, with 894 flats constructed in Battersea. Once again, this shows the thriving nature of the Build to Rent marketplace.

 

It's not without its downsides, though. Some would suggest that the rents aren't very affordable, especially in London, while there are still many more Build to Rent developments in the planning stages or under construction than there are ones actually completed.

 

While it's an emerging market, it's still fairly small-scale and Build to Rent homes only make up a relatively small part of the marketplace. In addition, half of the government's investment fund still hasn't been allocated, nearly five years after it was first introduced.

 

Critics would also suggest that Build to Rent is harming smaller landlords, who simply can't compete with the large-scale investment of big City firms. Some might be concerned that large, faceless organisations are having too much of a say in the private rented sector, at the expense of landlords who have been letting properties for years but have been left disillusioned – and financially worse off – by recent attacks on the buy-to-let market.

 

Others, though, will point to the burgeoning popularity of the sector and the increasing need for good-quality rental homes. If Build to Rent can supply that in big numbers, surely that's a good thing? Build to Rent properties – slick, professionally managed, well-furnished and communal – have particular appeal to millennials, a demographic that makes up a large part of the tenant market, especially in major cities.

 

One in four households in the UK will be renting privately by 2021, according to new research from Knight Frank. That's a rise of around 790,000 in the next four years, as the number of people renting rises from 5 million households to 5.79 million households.

 

This increased demand will need to be met. The growing influence of Build to Rent suggests it could be one of the solutions. It's currently worth £25 billion, but is expected to be worth £70 billion by 2021. Currently, 15% of all residential units being constructed in London are Build to Rent, and this is only set to motor.

 

There are concerns that Build to Rent is too London-centric, with only 35% of developments outside of the capital. There are also barriers in the form of planning policy and land supply. However, the government's recent Housing White Paper set out measures to speed up the planning process and increase the amount of land for developers to build on, which would both help with further growth.

 

One thing's for sure – the influence and presence of Build to Rent is only going one way. And many more investors will want a piece of an increasingly lucrative market.