When it comes to housing policy, successive Governments have alternated their focus between affordable housing and home ownership. The private rented sector has received comparatively little attention from Whitehall. But as the population expands, the growing need for more homes at a time of low levels of housebuilding is changing that.

Rising demand for private rented homes has prompted the coalition Government to launch a series of measures aimed at encouraging a wider range of investors to build homes for private rent. The two main initiatives – Build to Rent Funding Scheme and the Debt Guarantee Scheme, come in response to Sir Adrian Montague’s review of the barriers to investment in private rented homes published in 2012.

The schemes are accompanied by the launch of the Private Rented Sector Taskforce, a team whose mission is to bring the vision together.

The Government has estimated that the Build to Rent Funding scheme will deliver up to 10,000 rental homes. This in itself will not transform the market. But the proof of concept these deals provide, setting out models that work for different parties, helps to build confidence in a new market for residential property investment.

In order to increase supply of privately rented homes further, Local Planning Authorities must be open to negotiations regarding affordable housing provision. Although flexibility surrounding Section 106 requirements was a key recommendation by Montague, there is little evidence that this is happening in any meaningful way.

Build to Rent Fund

The second round of bidding for an estimated £400 million of funding from the Build to Rent Fund is currently under way. The deadline for applications is October 31st.

Launched at the end of 2012, the funding scheme supports the development of new purpose-built homes to let. As well as mitigating some of the risks for developers and investors, the Government seeks to provide proof that purpose built rented housing can meet housing need and investor requirements.

In response to high levels of interest from a variety of public and private sector stakeholders, the fund was increased five-fold to £1 billion in the 2013 Budget.

A first round of 41 projects is going through the due diligence process. The new wave of applicants in the second round will be focusing on building a more bespoke product that is designed to allow rental blocks to be run more cost effectively and to cope better with the wear and tear of tenant turnover thus delivering long-term management cost savings. We expect to see features such as extra wide corridors, service lifts, equal size bedrooms and ratio of bed to bathroom as standard.

Debt Guarantee Schemes

In a landmark initiative for private rented housing, the Government also launched up to £6.5 billion of debt guarantees available to organisations to invest in new privately rented homes. Together with £3.5 billion allocated to affordable housing and shared ownership, it adds up to a total £10 billion of backing for housing.

Yet despite initial approval from the industry when the measure was first announced in February 2013, there has been little take up so far. The Government’s failure to secure a financial house to run the scheme has impeded fast progress. But it is still early days.

Savills expects to see a number of the successful applicants of the Build to Rent Fund seek further support via the Debt Guarantee Schemes once the building projects are under way.

The guarantee is designed to attract investment into the private rented sector from fixed-income investors who want a stable, longterm return without exposure to asset level risk. It is available for portfolios with a minimum aggregate value of £10 million for private rented schemes.

Once it takes off, it will provide a completely new funding product aimed at lowering the cost of debt, increasing the number of homes housing providers can build and ultimately improving investment returns.

UK Guarantee Scheme

As a measure that sets out to stimulate construction activity and create economic growth by backing large infrastructure projects, the Treasury-run £40 billion UK Guarantee Scheme (UKGS) unveiled last year, may not immediately be recognised as a source of funding for housing. However, this summer the Treasury indicated that guarantees are available for residential development – down to £10 million loans.

The Government has already announced that a UK Guarantee will be provided to the Greater London Authority to support borrowing of £1 billion to finance the Northern Line extension to Battersea. The Government has also recently approved a Guarantee worth up to £75 million which will help finance the conversion of the Drax coal-fired station to biomass.

Bristol Harbourside

Homes for private rent in harbourside scheme

Among the most recent deals to deliver more homes for private rent, the A2Dominion Group has agreed to buy 46 homes at Crest Nicholson’s Habourside scheme in Bristol. A2Dominion, which has been running a medium-sized private rent portfolio of 400 homes for several years, will acquire the first 28 apartments in October and the remaining homes between January and March 2014.

John Knevett, A2Dominion’s chief commercial officer and deputy chief executive, said: “This deal with Crest Nicholson supports our strategy to grow the Group’s private rent portfolio to more than 1,000 homes over the next five years.”

Chris Tinker, Crest Nicholson’s Executive Board Director responsible for Build to Rent, said: “This forms part of a wider initiative where Crest Nicholson will be working with the HCA (Homes and Communities Agency) and its selected partners including A2Dominion, to speed up the delivery of new homes on several of its larger urban and suburban developments.

A2Dominion previously bought 102 homes for private rent from Crest Nicholson at the Centenary Quay project in Southampton. It was the first project to receive Government funding under the £1 billion Build to Rent scheme.

Taken from
Spotlight: Investing in Rental Britain