Real estate

Could BTR help overcome the UK housing crisis?

The Build to Rent (BTR) market could supply new housing quicker than a traditional build to sell approach. This approach removes the sales risk to developers as whole developments are pre-sold or forward-funded by institutional investors.

BTR is an emerging sub-sector within the private rented sector (PRS) in the UK. It refers to housing stock that is designed specifically for renting rather than for sale and is typically managed by specialist operators and owned by institutional investors.

The PRS has been fragmented for several decades with over 98% of current stock in the hands of individual landlords or small companies. Whilst much of this stock is of good quality and well-managed, there is a portion of sub-standard accommodation. The BTR model, through institutional investment, is trying to improve the standards within the PRS. The benefits of the BTR model include higher quality accommodation compared to the rest of the PRS, faster build times compared to the Build to Sell (BTS) model, regeneration/place-making benefits (job creation, increase in footfall) and improved management and service to tenants. Ultimately, the housing stock built under the BTR model should enhance the overall standard of housing in the UK. This is based on the assumption that institutionalising part of the PRS will increase and improve the professionalism of being a landlord.

Further investments expected in BTR

At the end of 2017, there were c.105,000 BTR homes completed, under construction or in planning across the UK. This is an increase of 50% when compared with the start of 2017. It is predicted that over £50 billion will be invested in the BTR market by 20202. A £50 billion investment appears to be a significant amount of money, but this only represent a fraction of the total UK PRS, which is worth over £1 trillion2. However, as the BTR sector grows, we will see new housing stock emerging that gives investors the opportunity to influence the design, unit mix and specification to enhance investment returns. Operators of BTR stock should be more service-led and professional. This will improve the overall quality of accommodation for tenants, potentially leading to longer tenancies.

Regulations and financing for large BTR development schemes

Of course, the BTR model is not without its challenges. Local planning authorities (LPAs) do not have a substantial amount of experience nor knowledge of the BTR sector compared with the BTS model. A lack of flexibility in the planning regulations can be a barrier to BTR development, especially regarding unit mix, design and space standards and car parking standards. Simply put, renters and owner-occupiers will have different requirements and therefore planning regulations need to appreciate and adapt to that.

Another key challenge is financing, most BTR development schemes are large and often require sizeable loans. Given that the BTR market is relatively new, lenders have been attaching higher risk weightings and therefore stricter covenants to their loans for BTR developments. This leaves BTR developers restrained as they may be required to hold more cash on their balance sheet. The government has introduced the PRS Debt Guarantee Scheme and the HCA Build to Rent Funding Scheme to help alleviate this problem. As the BTR market develops, lenders will have a greater understanding and potentially greater appetite to lend.

This year we are exhibiting with London Chamber of Commerce & Industry (LCCI) at their stand within the London Pavilion.

We would like to invite you to come along and meet our Real Estate and Construction team who will be in the London pavilion from 13th -15th March. We will have access to a designated lounge area near the LCCI stand and it would be a great opportunity to meet you during the conference.

References

  1. Build to rent: Unlocking the potential of an emerging property sector