Build-to-Rent Market Rises to Meet Britain’s Housing Shortage

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Build-to-Rent Market Rises to Meet Britain’s Housing Shortage

The Build-to-Rent sector (BTR) has emerged in the past 5 years to become a core solution to the housing crisis in the UK. In recent years, affordability has plagued the British property market, resulting in a widespread shift from home ownership to rental. In 2000, 70% of Britons owned their homes, more than any other Western European nation but this percentage has decreased significantly as more families turn to the Private Rented Sector, (PRS).

Up until recently, there was a time when getting onto the housing ladder was a key part of everyone’s financial life plan. The prospect of profiting on inflation, trading up and eventually having a substantial pension pot off the back of home ownership was irresistible. But then, it all stopped working. Supply faltered. Prices, and the deposits required for a mortgage, rose out of the reach of the majority who attempted to get on the ladder.

Number of Households in Privately Rented Housing Rises to 5 Million

In the years after the financial crisis, buy-to-let (BTL) became the investment of choice for millions. Then, in 2015, when pension regulations changed, the BTL sector continued its boom, subsequently expanding the PRS even wider. Demand for new homes for sale softened dramatically, even with the ‘Help to Buy’ scheme, which did nothing than line the pockets of housebuilders by boosting prices yet further.

Renting as a preferred option to home ownership is nothing new in the UK. Before the Second World War, Britain had a strong rental market, with professional developers putting up apartment buildings and houses designed to be let. In fact, 75% of us rented in 1920.

After the war, the acute shortage of homes led to rent controls, destroying the logic of private sector development. Council housing replaced the private rented sector as the main source of lettable housing. That period too is long over, with underfunded housing associations now supplying a modest level of mixed market and social rented space.

The Future of Build to Rent

It is clear that BTR can provide a significant proportion of the 300,000 new-build homes officially needed annually in Britain. Institutional funds are available as demand for pension’s increases. Sites are more available as competition moderates from build-to-sell, which can usually bid more for them. In the capital, Transport for London is partnering with Grainger to develop land and air-rights on TFL sites for 3,000 BTR homes.

Can anything prevent this from happening? The uncertainties in British politics are the main barrier. Investment will not be whole-hearted until the clouds of Brexit clear. The prospect of a Labour government, which was responsible for rent control before, is a worry. The policy issues over the provision of affordable homes in a BTR context need resolution.

A high proportion of the British today are still owners and can use the equity in their homes to support their retirement or care needs by downsizing, selling up, renting out or borrowing against their home value. As the proportion of owners falls, these choices evaporate. They must downsize, relocate away from friends and family or apply for subsidised housing at a vulnerable point in their lives.

Build-to-Rent Has Potential for Britain’s Ageing Population

The market for retirement homes is also a huge one, given the demographic situation and the need to release family homes to those with children. There is definite potential for Build-to-Rent companies to enter this market too, at price points suited to pensioners and with care available. Co-living facilities may be part of the answer, averting loneliness but also the care-home atmosphere.

As we move further into the twenty-first century, the changing shape of our cities alters the context for housing. Denser development, but with fewer owned cars and more transport options, will be quieter and cleaner as electric drive takes over. Climate and social challenges will still abound. Well managed, well-built and well-maintained housing stock will be a huge asset. Build to Rent will prove a very valuable service to the nation.

Exponential Growth Expected in Build-to-Rent Market

According to Savills, the BTR sector performed strongly during the second quarter of 2019, with a high number of homes reaching completion and entering planning. By the end of Q2 2019, there were over 32,000 completed homes, 34% higher than that identified at the end of Q2 last year.

The number of homes in planning now exceeds 74,000, a 20% increase year on year. The units in planning represent the largest share of the sector and total more than those completed and under construction combined.

The total number of new BTR units completed, under construction, or in the longer term planning pipeline in the UK now stands at 143,000, a 17% increase on Q2 2018. At full maturity, Savills estimate the BTR sector could grow to 1.7m units to be worth around £543.6bn, illustrating there remains considerable scope for growth in this market.

The Demise of Buy-to-Let

Growth in the BTR market has been accelerated by the deep contraction in buy-to-let in the UK. In a recent survey of 19,000 landlords 17% said they’re likely to sell up this year. More worryingly though, 56% weren’t confident property will provide adequate returns over the next ten years.

As affordability plagues Britain’s housing market, BTL investors have increasingly been ‘penalized’ by changes in taxation, which has significantly reduced their margins. These include the reforming of the ‘wear and tear’ allowance, a new 3% stamp duty surcharge and mortgage tax relief cuts.

One of the biggest obstacles to BTL investment will be the end of higher-rate mortgage tax relief. Landlords are currently able to offset mortgage interest payments against rental income. However, the 100% relief has been dwindling since 2016 and will fall to zero from April 2020 to be replaced by a 20% mortgage interest threshold.

Depleted income means people are now more reliant on capital growth although Britain’s uncertain economic future has put paid to that too. In 2016, before the Brexit referendum, the average UK house price stood at £210,872. The latest figure is £230,292. That’s a return of 9.2% in three years, and a far cry from the 22.1% rise in the previous three years.

Now we are in a spiral of forced sellers – people whose rental income no longer covers the cost of the property or who are uneasy with the turbulent political environment. Increasingly more former BTL investors are turning to build-to-rent opportunities as a more robust alternative.