What Is Build-To-Rent And Is It Worth It?
The buy-to-let sector is one of the most potentially lucrative in the arena of property investment, but the build-to-rent sector is a step up from private landlords making decent money from a relatively small investment. The rental sector is still very much thriving in the UK, but a large proportion of renters feel vulnerable and insecure in the face of short term tenancies, and they are also living in poor conditions at the mercy of a private landlord they can’t get hold of, and who more often than not, doesn’t carry out the repairs or maintenance work requested when they are tracked down.
Build-to-rent has emerged over the last decade as a solution to some of those issues for renters who still can’t afford to buy, but who also aren’t afraid of committing decent sums in monthly rent for a bit more security and a step change in lifestyle quality. This is what build-to-rent brings and it is why the sector is growing quickly and has seen huge investment in the last five years.
Some of the biggest finance organisations in the country are investing hundreds of millions into build-to-rent developments, with AXA, Legal & General and Allianz getting involved in big city schemes, whilst Swedish developers EQT Real Estate are joining forces with Sigma Capital for a £1billion scheme in London to create 3000 homes. Indeed, there are currently 172,000 build-to-rent homes either being planned, under construction or operational in the UK, with experts predicting a total of 200,000 will exist in the next couple of years. A number of schemes are underway and build-to-rent is rapidly spreading north too, but the rental sector still involves over five million people in the UK, so build-to-rent remains a small percentage of the overall rental market. But the overriding principle of the approach is what stands out as a game-changer that is having a profound effect on the market.
What is build-to-rent?
It won’t come as a great surprise to learn that build-to-rent has no hidden meaning, it is a scheme where investors develop housing with the express intention of renting it out. These schemes are usually in big cities and centrally located, where there is big rental demand, and 88% of build-to-rent properties are also apartments, though there is a rising interest in family-led build-to-rent properties in more suburban areas.
Predominately though, build-to-rent will be hi-spec and hi-rise apartments, and are usually defined as having a minimum of 50 available properties in one scheme. Apart from the better quality of living conditions and available amenities, a build-to-rent property will usually be owned and managed by one landlord or management company. This helps tenants by having a more professional and structured system, with a better point of contact and more formal agreements, such as complaints procedures.
Build-to-rent schemes emerged first in London, but have spread to other big cities and now most northern and midlands areas have schemes underway or in the pipeline, such as Dolphin Living, Get Living, JLL and Essential.
It is common for developers to manage and rent out the schemes themselves, to enjoy the full lifecycle of the project and earn good income from it, but they can also sell apartments to management companies to operate. In this sense, build-to-rent schemes are usually financed through development finance, bridging finance, or in some cases where portions are sold on, through a buy-to-let mortgage.
Why is build-to-rent so popular?
There are a number of reasons why build-to-rent properties have become so popular, and much of it is down to the increasing demands of the young rental market. Students no longer accept poor living conditions at extortionate prices, and those standards and demands carry on into their fledgling working lives. Young professionals now expect a higher standard of living, and the short term and more flexible arrangements of many work placements, make renting more attractive. The higher quality and more professional arrangements of build-to-rent are therefore tailor-made for this type of demographic.
We already know that the rental sector is still very strong, however, so perhaps a more influential factor is Government intervention in arresting the housing crisis and facilitating these new-build schemes. Build-to-rent schemes can change an area very quickly and help the shortfall in new housing. A 20% proportion of all build-to-rent schemes must be ‘affordable housing’, which is certainly helping the sector’s popularity, as there is a grave need nationally for cheaper, more reasonably priced housing.
What is the difference between build-to-rent and build-to-own?
Apart from the very obvious difference, ie. the property is built to rent out not to sell, the key difference, and what has shaped this sector into something new and exciting, are the quality and lifestyle shifts that build-to-rent have introduced.
Principally, build-to-rent schemes are designed for modern lifestyles and have the intention of creating a community within the building. So there are shared facilities that you wouldn’t normally expect to see in a hi-rise apartment block. These are effectively ‘serviced’ apartments, and may have communal areas with coffee machines, a laundry service, games room or a gym. There will be communal gardens that people are encouraged to use, and some schemes even have a concierge service.
This level of facilities carries on in the apartment itself, with a better spec of décor, white goods and smart tech functionality for heating, security and lighting. You can also expect the apartment to have a good EPC (Environmental Performance Certificate) Rating and have excellent safety features. A dedicated facility manager will also be appointed and become a key contact for all tenants, something you wouldn’t often see if your tenancy agreement was with a private landlord.
Of course, this improvement in facilities and amenities comes at a cost, and you can expect to pay more in rent for a build-to-rent apartment than for a similar-sized property owned by a private landlord.
What are the benefits of build-to-rent?
The many benefits of build-to-rent differ according to what kind of stakeholder you are:
Build-to-rent schemes can very quickly regenerate an area and change the demographic. Although most such schemes are in city centres, they often change a run-down area and bring tangible benefits. Usually there will be a knock-on effect of more shops, amenities, bars, restaurants and cafes springing up around the scheme, indeed many schemes rent out purpose-built ground-floor commercial space for such facilities, so much so that unless a passer-by looked up, they wouldn’t be aware that it was primarily an apartment block.
There are also improvements in landscaping and public realm to be expected, and some developments are subject to a Community Infrastructure Levy (CIL), whereby the developer pays a portion of money to the community for local improvements as part of the planning application. Of course, we should also remember that there is a possibility that some local residents will oppose all this.
The main benefit to the tenant is stability. Most build-to-rent schemes offer longer tenancies, and the improved facilities do attract a more committed and secure tenant. Naturally the better quality of features is a benefit to the tenant, and this also brings better compliance with safety and environmental performance. Build-to-rent is making moving to a new city more appealing, which is helping the jobs market significantly, particularly as the bigger northern cities become more attractive to people looking to move out of the capital, and such schemes are usually built close to major transport links.
Renting from a company rather than a private landlord will be more appealing to a tenant, and the affordable housing aspect may also be an attraction for some, though this does come with a caveat. By definition of the Government guidelines on build-to-rent, ‘affordable housing’ must be discounted at 20% less than the private market rate, but this rate can be set by the developer to cover the entirety of the scheme. So in effect, ‘affordable housing’ could be 20% less than a very expensive property, which won’t necessarily be what you would class as ‘affordable’.
Put simply, the primary benefit of build-to-rent for the developer is that properties are put to market much faster than if they were selling them. So they can earn rental income almost immediately. For some investors this might be critical in providing working capital or being able to move on and invest in the next development. Because there is such a strong rental demand in the UK, build-to-rent provides an opportunity for a long-term income stream, which of course is a key attraction. However, there is also some flexibility in that the developer can sell all or a proportion of the properties to a management company, depending on how they view the investment and whether they want a long term, stable income, or to recoup their money quickly. With some schemes, however, there are planning conditions which restrict sale within a minimum period, this also states that the same proportion of the scheme must remain as affordable housing post-sale.
So is build-to-rent worth it?
The growing popularity of build-to-rent suggests that the undoubted merits of such schemes offer sufficient benefits to all parties. The expectation of 200,000 build-to-rent properties in the UK by 2023 indicates that there is a demand for such properties, and it is not hard to envisage that the better quality of build and facilities will lead to higher expectations in the rental market. This does not mean that the need for affordable housing will disappear of course, and certainly, build-to-rent will satisfy one demographic in the rental sector but will still leave a shortfall in cheaper housing elsewhere.
In essence, the current situation with build-to-rent in a nutshell is that it is undoubtedly very popular and increasingly-so, but there is not enough of it. Build-to-rent is a fast-growing sector and developers will be pushing very hard over the next few years to realise more schemes in more areas, and whilst ever the sector enjoys Governmental support, as it does at present, for the investor, the tenant and the community, there are very obvious attractions.