Build to Rent is a nascent but growing sector that could help solve the housing crisis and give construction a boost. But do we need new planning legislation to accommodate it?

Olivia Tassell

Large scale purpose-built Build to Rent developments are increasingly seen as one of the solutions to the current housing crisis. Offering both flexibility and a sense of community, these developments are likely to prove attractive to the younger generation, who increasingly find themselves priced out of the housing market. But do such schemes need a dedicated use class or a covenant to rent?

Financial viability has long proved a concern for both developers and investors. Build to Rent schemes generate a much lower rate of return than the traditional build to sell model, which has tight profit margins based on income rather than capital release. For this reason, unpredictable costs such as planning obligations can prove one risk too far.

Some local planning authorities seem to be beginning to recognise the benefits of long term Build to Rent schemes. These developments can assist regeneration and place making, while also delivering substantial numbers of homes quickly and stimulating employment. Yet if local authorities are to be persuaded to reduce planning obligations for rental schemes, they will be understandably concerned to ensure that the proposed rental use is maintained.

Discussion has focused on two possible planning solutions - the creation of a new use class and the use of rental covenants.

The term “rental covenant” in this context refers to a restrictive covenant imposed by the local authority, as a condition of granting planning permission, requiring the units to be used only for short-term rentals (and therefore prohibiting sale of the individual units) within a defined period.

Discussion has focused on two possible solutions - a new use class and the use of rental covenants

Proponents of a new Build to Rent use class cite student accommodation as an example of how long-term planning constraints can attract activity and investment into an area, while at the same time providing local authorities with sufficient comfort for the future.

A new use class would certainly demonstrate that the government is serious about encouraging Build to Rent, in the wake of its ongoing home ownership initiatives. Furthermore, it would leave local authorities free to tailor planning conditions to the proposed rental scheme, in the knowledge that none of the units can be sold without a further planning permission - with a further set of conditions.

Yet in a nascent market like Build to Rent, many believe that a new use class would be a step too far. There is no apparent shortage of developers and investors keen to test the Build to Rent market, but the concept largely remains an unknown quantity in England. Flexibility therefore remains key to the overall risk profile.

Set against this background, rental covenants hold many advantages. Firstly, they are available for use now by local authorities and require no new legislation. Indeed, a number of Build to Rent schemes in London and elsewhere have already been consented on the basis of a rental covenant. In addition, details of the covenant can be varied between individual sites while still maintaining certainty for the local authority; factors such as the length of the required rental commitment and the proportion of market rent versus affordable/discounted rents will differ depending on the location and the community involved.

In the event that a developer wants even greater flexibility, a local authority may agree to financial clawbacks, allowing some or all of the units to be sold off prior to the end of the covenant on payment of a calculable, index linked sum per unit sold. For investors, a rental covenant provides a get-out clause; if the rental market has a downturn, or becomes less attractive following a legislative change, they will still have the ability to sell at the end of the covenant without the uncertainty of a further planning application.

As examples of successful Build to Rent schemes increase, we can only hope that more developers, investors and local authorities will be prepared to take the plunge and work together to achieve the perfect planning solution. If local authorities are prepared to listen to developers’ concerns and use their existing tools flexibly, there should be no need for further changes in the law.

Olivia Tassell is a partner at Boodle Hatfield