Planning holds the key to unlocking the Private Rented Sector
October 2, 2013
Housing Minister Mark Prisk’s announcement of a £400 million injection for the Government’s Build to Rent fund made headlines last month – with an invitation to house builders to bid for funds.
This brings the total available to £1.4bn – a big pot of money that the Government will share the risk or bridge finance to allow schemes to be built, managed or let. With around a quarter of Londoners living in private rented accommodation, the demand for more rental property is undisputed.
However, despite a historic tradition of people renting in this country, in the 19th and early 20th centuries, Build to Rent is a new asset class for developers and housing providers. We need to understand it and improve knowledge of how to develop and manage it – and how to optimise profit.
There has been a perceptible lack of interest from banks and funds because they have struggled to see the returns on investment. It is now down to developers, local authorities and housing providers to develop the Private Rented Sector (PRS) as a viable sector – and that will need the backing of the Government to help overcome planning obstacles, viability and affordable housing considerations.
Research by the think tank, the Resolution Foundation showed that the challenge is picking the right places to fit the target tenant and the existing local stock. It also found that there is a need to create a different product for tenants who will rent long term – the low to middle income households. To work for this group, build to rent needs to be viable without relying on above average inflation increases in rent and capital values, which will erode affordability in the long term.
I have been working in residential development for the past 30 years and have always been keen to embrace the next big thing in the sector. However, there are a number of challenges that will need to be overcome before Build to Rent becomes attractive.
Land availability is the biggest factor – and that is land in the right place, with good transport links to commercial centres, where people will want to rent. This is where the big test will come. When house builders and developers are bidding for sites, their sales business models means that more money will be offered than those seeking the site for build to rent. Acquisition values tend to be typically lower than open market values because of rental levels and targeted returns demanded by investment funds.
Will the site stack up for rentals when affordable homes are part of the planning requirement? Unlikely. The current planning rules just do not add up for the PRS. Developers dipping their toe into the rental pool will want to see reasonable returns on sites and they might very quickly decide the water is too cold when they see that capital growth on sites will bring greater returns than rental growth, especially in London.
Then there is the battle of the blocks: the prospect of bespoke large PRS schemes vying for the attention of renters with new-build developments that were snapped up by international investors. The latter may dazzle potential tenants at first but when they look at costs – higher service charges designed for owner occupiers rather than renters – they may opt for the PRS block. This will also have a downside for new developments when units remain empty – dispiriting for the owner occupiers and likely to impact on the shops and leisure facilities that rely on people to prosper.
For the Private Rented Sector to work, we have to think big. This might have echoes of the vast housing estates built in the 1960s and 1970s but we would have to learn from the mistakes of the past. However, the PRS does require quantum, to deliver economies of scale. This means large tracts of land. The approach has to be on durability and keeping down costs and service charges. The size and mix of units must be considered to maximise rental income. This puts a premium on efficient design, constructions, marketing and management.
For the PRS to be viable, we have to think long term to generate adequate returns – at least seven years. The majority of equity funds in the market are focused on more five to seven years. A large portfolio of longer-term investments could produce a yield just under 7%.
And how will it work for tenants? In most European countries, including the Netherlands, Germany and Sweden, where there is a tradition of renting, rental leases are generally indefinite and landlords can only evict for specified reasons.
We probably need to see a move towards the availability of longer-term leases to offer stability, particularly for families. This should be easier if we have institutional funds investing in the PRS rather than private landlords who may be renting out property for the short-term only.
Finally, there has been a lot of talk about PRS for a long time now. The Government has to realise that funds are important but the most vital element that needs to be put right is the planning system – the biggest single factor contributing to why we have such a desperate housing shortage in the first place.