Build to rent or build to build?

Build to rent, is it a way to get some top quality new rental housing or just another brick in the wall? There’s plenty of chatter about this new type of development coming forward, but what is it, what does it mean for the planning system and affordable housing and what will happen as the market matures?

Build to rent is in many ways something new. Large scale investors like pensions schemes are seeking ways to find returns and have hit upon the idea of having their own property portfolios. These aren’t mom and pop landlords with a property here and there, but organisations who have the ability to buy and sell entire buildings and blocks on a whim. But there is part of the problem- they like the idea of rental income from assets that grow in value over time but don’t want to have to deal with the issues relating to having leaseholders or other owners to get in their way.

What they’d prefer is a nice clean, wholly owned asset that can be theirs outright, traded easily and the rental returns known. This kind of housing doesn’t exactly exist in the UK (or in many places in the world) and the most obvious way to create it is to build it. So yes, there is hundred of millions of pounds floating around right now looking for investment in housing- hooray!

But that money doesn’t particularly care where it is investing, as long as it can get the best return for the investors. Where the best deal is might relate to the rents that can be expected, the land cost, the costs associated with planning and who will let them build exactly the kind of block they’d like to see. Manchester of Salford, Leeds or Bradford, London or Colchester, Milan or Barcelona- what matters to them, quite reasonably, is where the net return is highest.

Of course all housebuilders are like this to an extent, but whereas traditional builders are looking for a pipeline of land across a range of sites, from city centre to the surrounding countryside, to buy develop and then sell, build to rent developers are looking for inner city properties where the principle of development has been agreed since Victoria was on the throne where they can buy the land, build the asset and then hold it as such, selling on the whole unit at the appropriate time.

With traditional housebuilders the key issue fought in the planning system is where homes will be built. With build to rent the key issue is what homes will be built. As I mentioned above, the need for a nicely packaged up unit precludes anything quite as messy as sales of flats to a housing association or even something as messy as shared ownership or even, shock horror, someone else owning a property in their building! It would be bad for the portfolio to have a couple of appendages and provisos thrown in with any sale and therefore reduce the market value of the asset.

Many authorities in the UK, including big cities need significant amounts of new housing. This is both due to a genuine requirement to meet the needs of their residents and because they have more or less objectively assessed needs that are required to keep their planning system ticking over. A developer, whoever they are, turning up and stating that they are interesting in building a few thousand homes on underused or unused city centre sites is a godsend.

So let’s say you work for the planning department and a developer comes in saying just that- they want to build thousands of properties to rent. But there is a catch. Firstly, they are also talking to a few other cities and can only really decide on one or two locations to build at the scale they want. Secondly, their business model doesn’t really allow them to have affordable housing on site, so could they pretty please just pay cash instead? Thirdly, like all other developers, costs are high and profits are low, so they might not be able to pay all that much towards affordable housing anyhow. Fourthly, they operate in a cut-throat market where information is king, so please could any negotiations and agreements be held in secret?

Now, generals are always fighting the last war, but you’d hope planning departments are a bit quicker off the bat than that. Because let’s be clear, the opportunities for significant new developments are enough for authorities to have to consider changing their rules to keep ahead.

Earlier this week I praised Jennifer Williams’s recent article on affordable housing in Manchester. One of the key things behind the continued growth of city centre housing in Manchester -but also the complete lack of on-site affordable housing- is the willingness to get in front of the curve for build to rent. You can’t apply planning rules just for certain types of investments though, so every developer gets to play the same game- offsite contributions for affordable housing (sometimes called commuted sums), confidential viability reports, excellent but private shared spaces without significant contributions to public spaces.

Perhaps “race to the bottom” is too strong a term, but I think we need to see that Manchester is the outrider for city centre housing outside of London and look at the impact build to rent is having there.

As I’ve mentioned before, commuted sums as opposed to affordable housing onsite isn’t necessarily a bad thing, although there is a need to prevent areas from becoming ghettos of either rich or poor households. Councils or housing associations can use that money to invest in their own large scale schemes rather than a smattering of housing here and there and the smart ones could create their own mixed schemes with market and affordable homes side by side.

But no payments, or money that disappears into the ether through a viability process or into an “affordable housing saving fund” that never gets spent is never a positive thing. Development after development in or near a city centre without public space is also not great.

As with my previous comments on viability, I’m coming round to the view that no process framed around negotiation will actually be able to put the genie back in the bottle. The changes to the national planning policy framework may make some temporary difference, but I am going to firmly predict that a small army of lawyers and consultants will put us back to where we are now within 5 years. Amending viability simply isn’t enough for affordable housing, the goal must be to remove the connection between the two.

What might be better is putting affordable housing into some form of tax like the existing Community Infrastructure Levy. An amount could be worked out from the average square footage of a proposed development (or sale price of properties if you’d rather) and this could be paid to the council for them to build affordable housing (either directly or by housing association grant), with clear accounting to show this is done. A developer who wants to reduce this bill could offer a number of homes in payment for their charge, but this would be at affordable house prices rather than the full purchase price of the property.

Another change would be for local authorities to work together to set clear boundaries on what they will and won’t accept. Hopefully I’ve shown that there is an oblique strategy, perhaps even an unintentional one, to change the planning system in order to fit it around build to rent. If larger local authorities, for example the metro mayoral cities and the English core cities came together to set out what they would like their planning system to look like, they could seek to insist on published viability statements and set affordable housing quotas. This could stop developers trying to play one city off against another, but it of course comes with a healthy reward for cities going back on the agreement.

It remains to be seen how this new market will mature. As I mentioned at the start of the piece, one of the reasons investors are looking to build is because there aren’t currently the type of properties available for them to invest in. Of course there are other benefits to putting value into a bare bit of earth, particularly the one shared by more traditional housebuilders that this will appreciate the value significantly.

But once there are a raft of new build to rent properties available, will investors keep on building, or will they be happy trading the buildings that exist between each other? I’ll put that another way- there are plenty of shares that come onto the stock exchange, but the vast majority of the role of the exchange is to trade existing shares. Buy low, sell high, or at least buy for a lower price than you sell for! It is fair to say pension schemes dabble in the markets, usually in long term investments, so they are likely to be quite happy to think this way about property as well.

Sure there will be property managers who actually do things like sort out repairs and they won’t be affected by these shenanigans. The average tenant won’t notice ownership changing, perhaps the brass plaque outside the door will occasionally morph overnight into something new. But from a housing supply issue, we have to consider whether build to rent will be a major builder for many years to come or -once there are enough properties to play the asset appreciation game- whether it will be a niche portfolio for certain schemes to hold and trade between themselves.

If it is to be a major source of new housing then the issues seen in Manchester might be heading to a town near you on a large scale. If it is the former, then are the changes (or resistance to changes, such as publishing viability reports) being made to local planning systems (for all developments, remember) worth accepting for a limited local reward?

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