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Build to Rent Properties Explained

by | Oct 15, 2022

Home $ How to buy a property $ Build to Rent Properties Explained

Introduction

While still small compared to the number of privately rented homes in the UK, the build to rent is quickly growing. In the UK, there are currently over 150,000 homes under planning or construction set to be built in the next five years.

There is such demand because there is a changing mentality towards renting your home. The idealistic scenario of paying off a mortgage to own your home seems to be an outdated method of homeownership for many. This, coupled with a rise in house prices in the UK and London in particular has left many opting to rent.

This article discusses the many pros and cons and nuanced arguments to be made about the sector.

Large build to rent accommodation with balconies

What is Build to Rent?

The term build to rent refers to a development of housing that is designed for the rental market rather than the homeowner market. They include conveniences and luxuries incorporated such as gyms, bars and shared living spaces that appeal to the communitarian renter.  

What makes build to rent developments different to landlords just renting their properties is a series of regulated requirements. Landlords have to include at least 50 homes, strictly be solely for renters for at least 15 years and ensure each home is rented separately. Click here for a full list of the requirements landlords must follow to list their homes under the build to rent sector. 

Also, those renting these developments can benefit from long term leases that protect them from rent increases they cannot anticipate and give them a sense of peace of mind that doesn’t come with renting using short term leases.  

Additionally, for landlords, building houses with the ability to rent them out produces long term profits that produce large amounts of cash flow through collecting rental income. Perfect for landlords looking at a long term investment and producing the greatest rental yield from a limited amount of land.

What is the difference between Build to rent and PRS?

PRS refers to the private rental sector which means housing managed by private individuals or associations. This excludes public associations like local authorities, councils and non-governmental organisations.

The build to rent sector is a scheme included in the wider umbrella term of the Private Rental Sector as it is managed by private landlords.

Apartment complex in the build to rent sector

How Does Build to Rent Work?

Building to rent will require a lot of construction if you’re building from an empty plot of land and will require a lot of new construction work if converting an already constructed building. 

The exact requirements for qualifying for build to rent are below. From this list, you can understand the complexity of build to rent and how the scheme works for landlords. 

  • The development must include at least 50 homes (councils can choose their own number based on rental income) 
  • Landlords must not charge tenants additional fees prior to moving in besides deposits 
  • Operate under one management with all homes rented separately 
  • There must be an agreement to solely rent the development for at least 15 years 
  • Offer at least three year tenancies with break clauses for tenants 
  • Landlords must ensure there are no financial incentives to break any term on the build to rent agreement or face a clawback mechanism to deter this behaviour 
  • Provide a formula for any rent and service charge increase for tenants 
  • Arrange on site management who have a complaints procedure and are members of a recognised ombudsman scheme  

Despite the requirement for there being one landlord that owns the entire build to rent scheme, owners can change throughout the duration of a build to rent tenancy period even if there are tenants in situ at the time of it happening.  

Why is Build to Rent a good investment?

For landlords, build to rent offers reliable, predictable rental yields for a long time given the market research is correct on the housing demand for the area. For example, if a build to rent is built in the correct area, there will be a surplus of tenants looking for long term leases on a home. 

These have to be a minimum of a three-year deal according to the build to rent requirements so occupancy rates and therefore rental demand are often kept high. 

In addition, rents relative to the size of rooms are on average 11% higher than rents outside of the build to rent sector. Landlords are allowed to charge this amount because of the added benefits of domestic service for tenants which may include laundry or security. While also providing amenities like gyms, social spaces as well as furnished, modern living spaces 

Overall, build to rent suits a landlord who is inclined towards a long term, capital-intensive business model. This is due to having to keep the development for 15+ years.

Can Build to Rent properties be bought and sold in the future?

 To keep build to rent status, there is a specification that all homes must remain rented for a minimum period of usually 15 years. Unless a borough specifies otherwise. If this rule is broken there will be a financial payment to be made to the council. 

This fine is set up as such so the landlord loses money if this clause is broken. So generally, before the 15 years is over, selling never makes sense. Especially when other taxes like stamp duty and land tax are factored in as this can get extremely expensive on higher value build to rent developments.

However, afterwards, some or the entire group of homes can be sold but there is still an agreement that if a home is sold it remains under affordable housing.

Deciding on whether to buy or sell build to rent development

This means that if the developer cannot keep the home under the affordable housing agreement, they’ll have to ensure the unit is relocated within the area of the development. In other cases, councils will also require a payment that would otherwise be equivalent to the amount of money the tenant would have received in compensation for buying their home under the affordable housing act. 

In general, most landlords and developers will want to keep most of the units of their development rented out for as long as possible because of the implications of selling a home. So, it is important the landlord is able to wait for rental income in the long term before starting a build to rent development. It is most likely auctioning or selling a unit will cost them money.

Who is eligible to live in build to rent affordable housing?

The build to rent scheme is popular because it provides a lot of new affordable housing. With a lack of housing in general in London in particular, the government provides incentives for landlords to provide affordable housing in this way.

What is affordable housing?

Affordable housing is homes that are rented for below market value by at least 20% and are known as DMR (Discounted Market Rent) homes. These homes differ from social housing because members of the public don’t have to be eligible for social housing to live in affordable housing. You also don’t need to apply for affordable housing, it is just more appealing to those on a lower income.

It is important to remember that not all build to rent housing contains affordable housing and even the affordable housing in build to rent schemes are often above the average affordable housing rent prices anyway.

An affordable home living room in the build to rent sector

This is because the average price of rents in the build to rent scheme is usually above market value so affordable rents are still subsidised but not as much as they would be if a tenant rented from a landlord in a buy to let property for example. 

who is eligible to live in build to rent affordable housing?

Anyone is eligible for affordable housing. It is not something you have to apply for and be approved for. The government strives to keep a certain number of affordable rents in the property market for “households whose needs aren’t met by the market”. This is similar to other schemes like the help to buy scheme for example. 

Generally, those who live in affordable housing live there as a result of being priced out of a competitive property market. 

Who manages affordable housing?

Affordable homes are privately owned as they are managed by landlords and developers. However, the build to rent scheme is managed and the rules are amended by the government, specifically the Department for Levelling Up, Housing and Communities (DLUHC) 

Landlords who can help meet the affordable homes target which aims to spend 4bn from 2021 to 2026 to help house people over the coming years. These incentives can come in the form of grants and tax benefits that can be found on the government website here.

Pros and cons of build to rent for investors

Build to rent seems like a lucrative investment for landlords and investors but there are also some evident difficulties when planning and constructing a build to rent in this way.

As an investor, there are multiple things you have to worry about including communication with construction companies and architects. Being an expert in multiple fields is necessary for the success of a project. 

Pros of build to rent

There are government-backed tax incentives for landlords looking at build to rent for a long term investment. These include grants and tax benefits.

In addition, there is an extremely high capital appreciation compared to small developments. This is because while the investment cost is large for investors, over time the value of the property will go up in value at a higher rate than building individual homes.

While the investors will have to wait a while to be able to sell any of their units due to the clause in place that homes are strictly only there to be rented for at least 15 years, across, decades, there is no doubt that the investment for a build to rent development will be worth it based on the value of land going up overtime alone.

There is a clear rental demand to make a profit on investments which will result in build to rent developments having a high demand for people looking for rental homes. This is due to the value renters get from living in a shared space like this in terms of amenities and benefitting from a long term lease agreement.  

A considerable percentage of renters would rather pay a bit more rent for a shared space like this with amenities than live in a house by themself and have to manage more payments and headaches to run a household. Especially when running a large household. Click here for some useful tips on managing household payments in a large house if this sounds like you. 

For investors, there is also the ease of managing multiple tenants at once. There is usually the same software, processes or company involved with renting out the entire building. Furthermore, all renters are located in the same building with very similar problems, simplifying property management and reducing its cost.

 When comparing this to managing multiple single let properties, it is clear that a large development is significantly less complicated to manage. Especially when a lot of conveniences of a build to rent are shared so the manager of the building only has to deal with problems relating to an amenity once.

House under the hammer showing rent being paid back to landlords

Cons of build to rent 

The most significant downfall of build to rent for investors is that the method requires a high investment start-up cost because of the build to rent legislation stating there have to be at least 50 homes in the development.

This also results in there being a lot of capital at risk and a long period of time required throughout planning, construction and filling of the property for an investor to get a valuation and see a return on their money. 

In conjunction with this, the large scale of the project demands the management of a lot of people which would mean an inexperienced investor would struggle with setting this up.

For an individual with a lot of capital who perhaps doesn’t have the most extensive property management knowledge, jumping straight into a build to rent deal will be a bad idea. 

Pros and cons of build to rent for tenants

Just like there are advantages and disadvantages available for investors, for tenants, there are also pros and cons worth considering. It is not all appealing amenities and secure rental deals. There are too many downsides to the build to rent scheme.

Pros of build to rent

As a result of a build to rent scheme often being new builds as well as landlords wanting to create new ways to make the lives of tenants easier and more comfortable, a lot of build to rent developments suit a modern living style.

This helps attract new business and keep current tenants which is great for those who adore current conveniences like smart technology like gyms, tennis courts and luxury furniture.

Luxury living room found in a build to rent complex

Some of these facilities are usually shared which appeals to the communitarian tenant who likes co-living and mingling with people who live in the same building as them. Also, there is a range of build to rent developments to pick from with a wide range of rooms. 

Regularly, a tenant looking for a home may find amenities extremely specific to them like pet services. Finding a service like this outside of a build to rent scheme will be hard to find. 

In addition, build to rent schemes have to be run by the same landlord, this means the management of the development is well streamlined. This benefits tenants as it is clear who to speak to when communicating issues with their property to the landlord. Such issues can include reporting faulty equipment within the space, damage or problems with paying rent.

Finally, among the most popular reasons for tenants moving into a build to rent scheme is the ability to have predictable, long term, invariable rent payments. All costs like home insurance, gas and electricity and Wi-Fi are better able to be budgeted for once the rent payment is guaranteed. 

Giving the tenant the peace of mind that their home is secure. This is important for those looking to start a family and build a life around a location without the possibility of relocation in the near future.  

Cons of build to rent

  While some renters see the benefit in having higher rental payments on average in a build to rent scheme, others see this additional price as a deterrent to renting a home in the build to rent sector.

Additionally, the scheme doesn’t suit tenants who have families and young children because of the impersonal nature of renting as opposed to buying a home you own. For many, living in a build to rent scheme is not the traditional goal when having children or living somewhere for a long period. This is despite the protection given to tenants of fixed rent prices and long term leases.

It seems that the stigma of renting cannot be shaken for a lot of people. The idea of buying a house, adding to it over time and creating memories in a house you mould to make your own is the ideal picture of raising a family. Those in build to rent schemes miss out on the ability to shape the home they want around them as their family grows up.

Simple things like painting the colour of the bedroom walls a different colour to suit the interest of the family all have to be agreed upon with a landlord beforehand. There is evidence to support this trend as even those who wish to buy a second home rarely use this as a place to live. It is often for an investment. When a home purchase is made, moving out is often inconvenient and it is popular to stay there for a very long time.

Adding to this, many build to rent schemes take the form of apartments as landlords aim to get the maximum amount of rental yield from the same plot of land. This results in there being less outdoor space like gardens in these homes available for rent. As a tenant, you may then be limited in your choice of housing if you’re specifically looking for a home with a garden in a build to rent scheme.

Apartments showing a lack of outdoor space in built to rent developments

How fast is the build to rent sector growing?

Perhaps the most important figure from the below table on the growth of the build to rent sector is that in the UK as a whole, comparing the years 2021 to 2022, there was a 16% increase in the number of properties being completed.

That growth is huge compared to the number of homes being completed on general new builds. This brings the total number of build to rent homes in London to 96,585 and 14,777 in the surrounding regions.

The growth of the build to rent sector in Q2 2022

Conclusion

In recent years, there has been a shift in the way people are living. More and more people are choosing to rent instead of buying a home. This is especially true for young adults who are just starting out in their careers.

While there are many reasons for this trend, one of the biggest is that renting is a lot more affordable in the short term than buying. Also, build to rent offers a modern lifestyle that appeals to many tenants at a relatively cheap price for what you get.

Having said this, build to rent is not for anybody, even experienced investors who have done advanced operations like buying a house with no money may need to consider their options carefully before planning a build like this as while a build to rent project can be lucrative, the option comes with a fair bit of risk and a large amount of capital to get started.

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