A new way of life: Creating a built to let market

It was with disappointment and admittedly some surprise that I noted that the private rental sector was not a part of the Budget speech. The creation of a robust, professionally owned and managed private rental sector through build to let is a major opportunity for the housebuilding sector as well as a model for encouraging social mobility.

Thankfully, this consternation was short-lived, as the Homes and Communities Agency (HCA) has picked up the build to let mantle and published an expression of interest request on 1 May. It seeks suitable models and structures from funds and institutions that are willing to partner with the HCA to acquire and place appropriate assets into managed residential investment funds.

Selling the idea

We are encouraged by the early response to the HCA from across the sector. A number of our clients have actively engaged with the expression of interest and we are aware of a groundswell of interested parties that are exploring the options.

However, the cynics are also out in force. There is considerable doubt that private rental blocks can become a reality in the UK. It seems an appropriate opportunity to address two of the key challenges:

• A preference for owner-occupation
• Residential investment properties are always worth less than vacant possession value

Tenure choice: The British are not the only ones who are precious about home-ownership. Our level of owner-occupation stands at 69%, similar to the US level (68%) where institutional investment into residential is significant. With buyer confidence at an all time low and mortgage companies requiring 20-25% deposits, the outlook for higher percentages of owner occupation looks bleak. A 1% shift towards private rental represents 222,000 properties.

Yield-valued asset: The value of residential property is traditionally based on its open market value. This is always higher than the value of the same property based on its rental yield, because after the costs of property management and other items, the net income has been eroded significantly from the market rent. The capital growth expectations were often the main reason Buy to Let investors bought property; a more institutionally led sector would need to rely on the income yield alone.

The US market provides an excellent exemplar of how a mature institutionalised rental market can work - perhaps that is the model the HCA would like us all to consider. There are 18.1 million rental units in the US, 3.8 million of which are in blocks of more than 50 units. These purpose built rental blocks benefit from economies of scale through efficiencies of management, all of which comes with a smile. In the US, tenants become residents and developments become communities and ownership is almost exclusively institutional with buildings rarely broken up for sale. Nothing like this exists in the UK so there will be many in the construction and building industry that will be hoping the HCA find a model or structure they can support.

Home truths

Make no mistake however; the challenges of developing of a build to let sector in the UK are substantial. Our solutions, while drawing from experiences elsewhere in the world, need to be homegrown. We need institutions that understand the unique nature of developing property in the UK.

The size of the prize is huge, but build to let will not be the panacea for the shortage of decent homes in the UK, nor will it make much of a dent in aspirational supply targets. However, it will be a serious adrenaline boost for a housebuilding industry on its knees, kickstarting a sector that is experiencing the worst trading conditions for a generation.