Build-to-rent promises an end to tenants’ horror stories
As investors pile in, renters finally have an alternative to traditional landlords, writes Jack Torrance
Everybody who has lived in a few flats owned by buy-to-let landlords has a horror story. For some it will be the broken boiler that left them shivering under cold showers for weeks on end, while others will complain of having hundreds of pounds knocked off their deposit for failing to dust a shelf when they moved out.
In the days of yore this would have been a temporary problem to be laughed off after the hard-pressed tenants finally saved up the cash to buy their own place. But as many of today’s 20 and 30-somethings face up to the fact they are likely to spend a majority of their lives in somebody else’s house, they are beginning to wonder if there may be a better option.
Britain’s burgeoning build-to-rent industry hopes it can be at least part of the answer. Its basic premise is that by building flats on a large scale and then letting them out rather than selling them on a piecemeal basis, corporate landlords can afford to provide a better service than your typical buy-to-letter.
At the same time, it gives patient institutional investors, many of them pension funds, the opportunity to put some of their cash into residential property without the risk that comes with building houses in the hope of flipping them for a quick profit.
It is a model common in other countries including the US but has only recently started to take off in the UK. The sector’s trailblazers include Get Living, with backers such as the Dutch pension fund APG, which has converted the athletes’ village at London’s Olympic Park into flats, and Quintain, which is owned by US private equity firm Lone Star and is building homes on a massive swathe of land surrounding Wembley stadium.
UK investment firms including Legal & General and Prudential-owned M&G have become involved in recent years, with plans to build thousands of their own flats. Dan Batterton, who heads L&G’S build-to-rent operation, says it is an attractive model because it offers a steady stream of income.
“What we want from our rent is ideally for it to go up with inflation, because our pension fund investors are trying to achieve income that grows with inflation,” he says.
And unlike other parts of the market, it should be fairly resilient in the event of a downturn, he suggests. “In an economic crisis people may not be able to afford a mortgage or a deposit, but they still need to live somewhere.”
Investors are clearly being won over. Though the sector is growing from a very small base, the number of completed homes rocketed by 45pc year-on-year to around 21,000 by the end of March, while almost 100,000 more are under construction or on the drawing board, according to the British Property Federation. While the investment case may seem attractive, part of the challenge now is convincing tenants they can provide a lifestyle better than they could attain by buying.
Developers use their scale to offer perks like free broadband, as well as more extravagant ones such as membership of car clubs, on-site gyms and swimming pools. There is also a focus on community: M&G’S residents are treated to monthly communal breakfasts and running clubs.
The schemes are almost all big, modern apartment blocks based in city centres that are likely to appeal to young professionals, though Batterton says L&G’S tenants are surprisingly diverse: “We’ve got 18-year-olds and 70-year-olds living in the same building, we’ve got people with babies and people with grandkids.” Rents are not exactly cheap – L&G’S the Slate Yard block in the centre of Manchester charges £1,300 a month for a two-bed flat. But Batterton says they attract people on a range of incomes, including “people below the average wage”.
“There isn’t a stereotypical build-torent renter,” adds Simon Chatfield, who runs Be Living, a build-to-rent operator with two schemes of 300 flats in London. “It could be a chef, a barrister, or anything in between really.”
After years of neglect the sector has received the backing of central government with its inclusion in the national planning policy framework last year, but developers say they are still struggling to win over local councils. There are also questions over whether the model can work for a broader range of properties. Some developers, such as Sigma, have gone down the route of building housing estates but for now the vast majority of build-to-rent homes are pricey city centre apartments.
“You’ve got a lot of developers and investors focusing on producing and delivering build-to-rent homes that are targeted at a very affluent part of the market,” says Lawrence Bowles, a research analyst at Savills, who warns there are only so many potential renters who fall into that bracket.
And while renting properties out might seem like a safe alternative to building homes for sale, it is not a licence to print money. Quintain boss Angus Dodd warns those who provide a poor service could struggle to keep their homes occupied. And if the buildings themselves are not constructed with care then they might not be able to pull in cash for as long as investors hope.
There is also the prospect of tighter controls on rents should a Jeremy Corbyn-led Labour Party come to power. But there is none the less a great deal of optimism in the sector.
Jonathon Ivory, who runs the UK arm of US developer Atlas Residential, believes build-to-rent will “change the face of real estate in the UK” and become the “go-to choice for land owners, developers and residents”.
“In the US even if you have 20,000 units you’re just beginning to get to scale,” adds Quintain’s Dodd. “Nobody in the UK even has a pipeline over 10,000. There’s clearly an opportunity for one or two dominant players to emerge.”
The former London 2012 Olympic village has attracted new apartment developments