The new government must remove planning obstacles from build-to-rent developments to allow the sector to compete with the rest of the market if it wants to encourage growth, says Chris Tinker
The planning and affordable housing consultation paper, issued in February 2017 in support of build-to-rent (BTR), closed on 1 May. The consultation aims to support the growth of the BTR sector and seeks to address key barriers to entry.
Taken together with the housing white paper, the tone of the consultation makes clear the government has been moving away from a staunchly pro-home ownership policy towards a wider and more inclusive tenure base – a welcome trend that I hope will survive the impact of the upcoming election.
The key advantages of BTR include a boost in housing supply, increased speed of delivery (potentially suited to modern methods of construction), higher densities, professional management and improved levels of service.
However, while the benefits of additional resident amenities and greater flexibility are recognised and championed, market and regulatory failures are an ongoing barrier to entry.
The scale of the challenge is plain to see. With £50bn of institutional funds available (sufficient to buy around 200,000 BTR homes), the stated ambition in the consultation is to reach a supply of 10,000 BTR homes a year by 2020. This means it could be decades before the available funding can be placed. This is the key driver for the government’s desire to address the barriers to entry as soon as possible.
At Crest Nicholson, we have embraced BTR as a means of accelerating delivery on larger urban developments and appropriately located suburban schemes. Approximately 10% of our output is BTR homes, delivered in partnership with institutional investors. As a result, we have first-hand experience of the planning and affordable housing challenges faced by the sector and the impact of these on scheme certainty and viability. It is clear many of the barriers are real and intractable.
While it is not subject to a separate use class order, BTR goes head to head with open market housing in land value and planning. In a market where competitively priced mortgages and Help to Buy act to support the home ownership model, and planning policies for BTR remain unclear, BTR finds it difficult to compete. The exception is on larger-scale regeneration sites where open market sales risk is at its greatest, or projects where cash flow is critical.
However, the government’s planning policies are clearly not tailored to recognise the different characteristics of BTR. Despite the Montague report in 2012 and the government’s build-to-rent task force, planning officers outside London and a couple of our major cities have little or no knowledge of the BTR sector. Generally developed at greater density than open market housing, and with increased levels of amenity, BTR regularly runs into exaggerated policy and viability challenges.
The deliverability challenges of BTR include:
- Ongoing local planning authority caution around increased density of housing.
- Unclear parking standards, making design unpredictable.
- An increased build cost of extra density and related parking.
- Lower values/ft2 when voids and proper management costs are factored in.
- Increased Section 106 and Community Infrastructure Levy payments (often payable on enclosed parking structures and amenity space).
- Inappropriate affordable housing policies including: inflexible tenures, ill-defined policies and uneconomic levels of provision.
As a result of these, planning for BTR can become a very uncertain process and the cost and time involved can be very prohibitive. Institutions in particular find abortive planning costs difficult to support. So the government’s emphasis on the need for local planning authorities to have clearer policies to encourage BTR are welcomed. Five years on from the Montague report, however the lack of reform within the planning system to date remains a critical blockade to increasing BTR supply.
The government’s planning policies are not tailored to recognise the different characteristics of build to rent […] it regularly runs into policy and viability challenges
Outside London, the treatment of affordable housing on BTR schemes remains a challenge. With sales values of £700/ft2 or more in London, the cross-subsidy of affordable housing on open market and BTR schemes is far easier than on schemes elsewhere in the country, where sales values only average £250/ft2 to £350/ft2.
The consultation advocates a new affordable rent model where a minimum of 20% of units should be delivered at a minimum of 20% discount to open market rents. While the emergence of a tenure well suited to the management characteristics of BTR is to be welcomed, the belief that 20% of units on these lower-value schemes can be delivered as affordable rent, while leaving the BTR model viable and competitive, simply doesn’t add up.
There are two areas where the consultation deserves credit: first, the recognition that planning covenants restricting the sale of BTR units into the open market are to be discouraged. Secondly, the concept of an affordable housing “claw back” through payment of a reduced sum, should BTR units granted consent without affordable housing be sold into the open market, is appropriate in circumstances where open market housing would have otherwise delivered affordable homes.
BTR is required to support a growing proportion of households in the UK and there are ample institutional funds available to finance delivery. However, realising viable planning consents that deliver acceptable value when compared with open market housing schemes remains the principal obstacle to the growth of the sector.
The newly-formed government, after the election, will need to pick up the planning policy evolution straightaway if it wishes to see the sector flourish further.
Chris Tinker is executive board director and regeneration chairman at Crest Nicholson