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More people are renting than ever before. According to a government survey, the private rented sector (PRS) is the second largest tenure in England behind owner-occupation, accounting for 20% of households in 2016/17. With the number of PRS households doubling in size in the decade to 2016/17 (to 4.7 million), this growth is set to continue.

The report by Knight Frank in this magazine lends support to this phenomenon.

It is perhaps of no surprise then, that The Institute of Fiscal Studies has found that the number of home-owning 25 to 34-year-olds fell from 55% in 1997 to 35% in 2017, whilst average property prices in England rose 173% in the same period.

Within the PRS, the build-to-rent sector (BTR) is also on the rise. According to data released by the British Property Federation, between Q4 2017 and Q4 2018 the number of completed BTR homes increased by 29%, the number under construction by 39%, and the number completed, under construction and in planning across the UK increased by 22%.

The biggest BTR market under construction is aimed at young professionals. As it gains momentum, BTR is evolving and diversifying from serving 25 to 34-year-olds to tailor for tenants at all stages of their life. There’s increasing focus on families, with a number of schemes in the pipeline including houses. At one end of the lifecycle is a generation of students used to living in professionally-managed purpose-built accommodation with facilities and amenities. At the other end of the lifecycle is rental accommodation for senior or retirement living.

Planning policy has been one of the major market hurdles for BTR – but the government is catching up.

A blueprint for change

The revised National Planning Policy Framework (NPPF), published in July 2018, encourages residential development to have a mix of tenures, types and sizes to reflect local housing demand.

BTR is now recognised as a distinct asset class. It’s defined in the revised NPPF as typically “100% rented out” purpose-built housing on the same site, professionally managed under single ownership and management control, and offered on longer tenancy agreements.

The revised NPPF also defines affordable housing for rent, expected to be the normal form of affordable housing provision for BTR. It’s known as affordable private rent (APR).

Published in September 2018, specific BTR guidance requires councils, as part of their plan-making process, to undertake a local housing needs assessment. This takes into account different types and tenures. If a need for rental homes is identified, councils should have a policy setting out their approach to promoting and accommodating BTR.

The small print

  • APR homes shouldn’t be distinguishable in size or quality from market rent homes, and they should be distributed throughout a scheme
  • APR, as well as market rent homes, should be managed within a scheme by a single BTR landlord, with no need for a registered provider. The management process includes rent levels, apportionment of homes across the scheme, marketing, and agreements for lettings, management and service
  • Councils must take a reasonable position in negotiating eligibility to occupy APR homes. Names can be suggested from housing lists, but direct nominations are frowned upon
  • Alternatively, a dataset for the scheme can be assembled. Although the final decision over eligibility should be made by the BTR operator, identifying candidates and agreeing on them could be complicated
  • Within any scheme, 20% of properties should be APR homes priced at 80% of the market value (including service charges) for the same or equivalent property. Councils can set a different proportion of APR homes if justified by evidence from the local housing need assessment and the policy set out in the local plan. Guidance on viability (updated in July 2018) also requires councils wanting to set a different APR proportion, or different discount levels, to justify the changes through a viability assessment at the plan making stage
  • Developers are expected to comply with BTR policy requirements. The guidance on viability does allow developers, in exception, to propose alternatives for individual schemes, such as variations to the proportion of APR homes, the depth of discount, and the ability to review rent levels over a scheme’s lifetime
  • The proportion of APR homes provided and the level of discount offered can be varied across a scheme over its lifetime. Any trade-off must be consistent with the overall affordable housing contribution agreed at the outset and an annual statement must be provided to the council to show that the scheme continues to meet it
  • Schemes are expected to remain within the PRS, and the APR homes provided and maintained in perpetuity. The full or partial break-up of a scheme shouldn’t result in the withdrawal or loss of affordable housing. The guidance recommends a clawback arrangement to recoup the capital value of affordable housing provision if APR homes are withdrawn at any time, and there’s a formula for calculating the amount of clawback payable
  • Councils can use covenant periods to retain market rent homes within the PRS, but the guidance doesn’t fix a minimum period. Councils must decide how to structure any clawback arrangement where market rent homes are converted to another tenure before the end of a covenant period.

In practice

The revised NPPF and the BTR guidance show support at national level for BTR. The policy recognition of BTR is welcome and the guidance provides some clarity. So far so good – at least in principle.

However, this is only guidance. Will councils be encouraged to embrace BTR? In practice there’s wiggle room for reluctant councils at local level.

The BTR guidance leaves the scheme-specific details to be negotiated, agreed and set out in a section 106 agreement. Complicated and lengthy negotiations won’t be welcomed by developers working to tight timescales and margins. Placing onerous restrictions on BTR will impede investment and delivery. Schemes must be easy to manage, give stable revenue, long-term rental streams and steady income growth.

Flexibility is essential over the lifetime of a scheme, in limiting development and operational costs, and coping with changing market conditions. Developers may need to break up a scheme, sell individual homes or the whole scheme to owner occupiers or multiple landlords, or convert APR homes to another tenure. In the case of APR homes, a clawback mechanism is proposed. Guidance on market rent homes isn’t clear, and developers and investors will need to take into account the price of not being locked into a covenant period when assessing a scheme’s financial viability. As for lenders, the guidance is silent on whether and how they may be exempted from any covenant or clawback arrangements.

To capture consumers for their full lifecycle, schemes must provide lifestyle, experience, community and brand. Including APR homes will have an impact on a scheme’s financial viability. APR homes, by definition, achieve a lower rental rate than market rent homes, and have the potential to dilute a scheme’s brand, affecting the marketability and price of the market rent homes.

The affordable housing provision is presumed to be APR, but developers may be able to agree other forms of affordable housing or a commuted payment with the council. Paying a commuted sum upfront in lieu of the provision of APR homes on-site may be an attractive option, and one which maintains the status quo. While in theory, the new planning guidance goes towards promoting the necessary changes to effectively meet new housing demand, in practice, success will depend on developers and councils finding mutually agreeable solutions to the PRS conundrum.

Key Contact

Vanessa Horn