The recent announcement that there is going to be a significant policy shift relating to the treatment of affordable housing in London for build to rent developments could provide the injection of confidence that investors circling the sector are looking for.
So far the ‘innovators’ have been making their way through the layers of uncertainty and satisfying themselves that what they are doing will eventually be in line with a benchmarkable sector in the future. However, there are a significant number of large-scale investors that have been quietly going about their business and are preparing to enter the fray once they have satisfied themselves with the risks attached to a yet unproven sector.
One of the significant grey areas surrounds the provision of affordable housing and whether build to rent developments should be treated in the same way as build to sell. The absence of clear guidance, combined with the Mayor of London’s policy for a strict 35% presence of affordable housing with any new residential developments in London, has created uncertainty within the market as to what assumptions should be used when assessing viability of build to rent schemes.
The industry has been lobbying the government for a distinction from the build to sell provision and it appears that the industry voice has been listened to. The Supplementary Planning Guidance issued this week and subject to a three month consultation period, means that, if adopted as proposed, the entire affordable provision within bespoke build to rent schemes can be delivered by discounted market rent (DMR), with all units remaining under the owners control.
What would define a build to rent scheme?
- A minimum of 50 units, all for rent
- A level of professional, on-site management and services provided
- Covenanted as rental for at least 15 years
- Unified ownership and management
- Three year assured short hold tenancy
- No letting fees
The discounted market rent would be set at the ‘London Living Rent’, defined as a third of the local income; though we understand that the GLA will be flexible, dependent on length of rental covenant. However, the guidelines do not allow for units smaller than the minimum space requirement of 420 sq ft. The British Property Federation (BPF) had proposed a 10% reduction to increase viability, suggesting that the provision of amenity space would off-set the reduction.
What does this mean for developers and investors?
The provision of affordable housing in the Capital has been a ‘political hot potato’ for some time, but it is an issue that has been difficult to find a magic pill for. The balance between the social responsibility to provide affordable homes for people on lower incomes and making developments viable is a delicate one.
This policy shift suggests that the GLA see build to rent as a solution to the issue. As a nation, over generations we have seen owning our own home as an important step in life; however, as people have become more transient due to improvements in transport and technology, there is a powerful argument that rental accommodation, and professionally managed rental accommodation in particular, is a vital part of the solution to the UK’s housing crisis.
If adopted, this change in policy will help standardise planning assumptions when developers are assessing the viability of build to rent schemes. Stances on affordable differ greatly from borough to borough in London – some see build to rent as a solution to the affordable conundrum and shortage of housing and others do not. This inconsistency has meant that developers have had to spend significant amounts of time and costs in satisfying themselves with the likely outcome of a planning application, but this policy change would help more accurately predict what affordable provision will be required.
From an investor perspective, in a sector which is still taking shape any change in policy that reduces risk will mean increased comfort with entry. Some institutional investment committees are still getting used to the idea of funding developments in an unfamiliar sector that have initial 100% letting risk on practical completion. Therefore, anything that can be done to reduce risk during the development process and improve understanding in the sector will be well received.
And, a combination of developer confidence in viability assumptions and better understanding and reduction of risk to the investor will mean more demand for product, resulting in a greater competitive edge for build to rent developers against build to sell when it comes to securing sites.
Importantly, there would also be social gain. This approach to the provision of affordable housing in build to rent schemes would create more sustainable developments, with a mix of people living together rather than housed in separate blocks either on or off site. It would help to create developments with a depth of lifestyles and a strong sense of community. Proven to significantly increase tenant retention, ultimately this will result in fewer voids, which goes full circle back to the investors’ cash flow.
Notes to editor
Andy joined Allsop in September 2006 as a graduate, becoming a Partner in the Commercial National Investment team in 2015.
He acts on behalf of vendors and purchasers across all sectors of the national investment market, with a particular focus on the retail, leisure and build to rent sectors. His expertise lies in development funding and mixed use schemes.
The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer.
If you would like to get in touch with Andy, please contact him:
email@example.com or +44 (0)20 7543 6720