Build to let could be a real positive for the industry as although it clearly has a lead in period the additional benefits of purpose built stock are vast. This includes higher rates of efficiency on gross to net income ratios, the potential to create aspiration products which have customer loyalty and sophisticated landlords and managers returning a high level of service to the consumer.

The build to let market will have its challenges as it will need to be focused on land traditionally targeted to the owner- occupier market. The majority of this land will be in the control of Britain’s housebuilders who need to play a major role in the progression of build to let.

The development of the build to let market will therefore not only require an acceptance from housebuilders that forward commitments on purpose built stock can be beneficial to the delivery of wider strategic sites by de-risking an element of the scheme, but also an agreement from local authorities that the delivery of private rented stock will specifically meet local housing needs. Situations where build to let is most likely to be acceptable to housebuilders would include:

• Stalled sites where the owner-occupier market is not active

• Sites where development finance is constrained

• Larger strategic sites where build to let can act as a catalyst for private sales.

Development viability

There is a limit on the length of planning restriction, given the impact which this could have on the development mix. This impact is best illustrated by the example of a theoretical 500 unit scheme with 350 market units and 150 affordable units valued at 45% of vacant possession value (see table 4).

A 100% PRS scheme with a 10-year planning restriction that would fail to deliver a comparable GDV, while dropping all of the affordable units would weight the scheme so heavily to the PRS, it could become difficult to absorb in the market.

Our analysis suggests that, in this case, it is more likely there would be a one third or two third reduction in the affordable units and between market and PRS units on the residue. This may vary according to the relationship between affordable and private rented housing values at a local level; something which could be affected by the withdrawal of subsidy.

In the event that a 20-year planning restriction was imposed, a much lower number of PRS units would be deliverable relative to market units.

Given these kind of trade offs, investors, developers and local authorities should be encouraged to identify the need and scope for PRS accommodation, so they can make rational decisions and deliver build to let to market capacity. Then the overdue need for institutional investment in the sector can become a reality. Our research suggests there has never been a better time.

Financial viability

The main challenge facing build to let is how to preserve the financial viability of a scheme, without unduly impacting on land value. In simple terms, a straight swap from private sales to market rent would reduce gross development value and hence land value, a fundamental problem holding back the housebuilders and developers.

Two potential solutions may include:

1. Taking a cue from the student housing sector. Private rented accommodation, without a s106 requirement for affordable housing, would enhance viability for a site with a range of tenures.

2. Taking this a step further, by reducing the affordable housing provision in return for a balance between private rented accommodation and private sales would also benefit viability and maintain lend value.

Both approaches would require local planning authorities to provide greater flexibility on planning consents, agreement over the length of the PRS provision and the impact on viability.

Delivering tailored products

Part of the challenge for developers will be to deliver products tailored to the investment market, that are weighted towards the requirements of both ‘Generation Rent’ and the bulk investment market.

Providing more, smaller units at a higher density could have the additional benefit of limiting the trade off with affordable and private housing. Reducing lifecycle repair costs could improve net yields.

Providing electricity, insurance, service charges, ground rents and telephone and internet packages could generate additional income streams from letting. This tends to be the approach used in more mature international markets that have been highly successfully at securing private investment into the residential sector.

Although there are already some institutional landlords operating in a similar vein in the UK, such as Grainger and Evenbrook, this situation raises the prospect of more investment from landlords willing to provide a service that benefits from scale rather than the approach used by buy to let landlords.

Taken from
Spotlight: Rental Britain as an Asset Class