Is build to rent a good or bad thing for investors, landlords and tenants?

publication date: Aug 3, 2015
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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Is build to rent a good or bad thing for
investors, landlords and tenants?

Flats in London - Is Build to Rent a good or bad thing - Kate Faulkner

At last we are starting to make some inroads into the lack of property stock in the UK. With a predicted one in five or more people expected to rent in the future, just building new properties for sale via Help to Buy or 20% discounted homes for first time buyers, isn’t going to help us out of the current hole we have in our stock levels.

So what is build to rent
Abroad we often hear about people renting into their 40s and how ‘great it is’. This is mainly because tenants rent from large corporate landlords, not individual buy to let investors. It also means there are thousands of properties specifically built to rent. Developers abroad tend to build blocks of apartments and housing which is then sold to companies who want to let and manage them. These companies are often backed by pension funds as they like the regular cash flow and returns.

In the UK our developers/corporate landlords tend to have 1% of their stock as residential, whereas abroad it’s as much as 50%. A lack of ‘institutional investment’ as it is referred to has meant we have missed out on huge amounts of additional stock which other countries have benefited from.

Recognising we don’t have this type of market in the UK, build to rent was first boosted by the government a few years ago when they announced a fund to help back developers building properties specifically for long term rent. It didn’t matter whether you were a private developer, housing association or indeed a council, you could apply for the funding and still can.

Done in a clever way, the government effectively loaned or backed loans to developers who were happy to build properties specifically for rent. This means it shouldn’t really cost the taxpayer anything in the long run, but should create a market, which in this country, doesn’t currently exist.

Who will build to rent help?
For any tenant group battling to help their consumers, backing build to rent, to me, should be the greatest priority. At the moment many people are spending their time blaming landlords and letting agents for tenant problems, when in the main, the issues are there just isn’t enough stock to go around and current rules and regulations for letting properties isn’t being enforced.

That’s why tenants have little choice and have to accept properties below standard.

Tenants will benefit massively from build to rent because:-

  1. They are built for renting. This means communal areas such as washing facilities which reduce the likelihood of damp and mould and they don’t tend to have gas central heating, so are easy and quick to fix problems.
  2. The landlords are corporate businesses. They make their money from renting property. Individual buy to let investors can end up getting divorced, sick or die, meaning they are forced to sell the property and let the tenant go, especially as nearly 80% of landlords only have one property they let.
  3. They understand tenant’s needs. Corporate landlords tend to build the right properties in the right areas from the start, so they don’t end up trying to rent something which isn’t fit for purpose, much better for the tenant.

Who will build to rent hinder?
We are so short of stock in the UK that it is unlikely that these new corporate landlords will affect returns of individual buy to let investors in the long run. However, in the short term they might. Although in areas like London we have tremendous shortages, in areas like Nottingham, Leeds or Manchester, the shortage isn’t as great.

In the short term, imagine 100 or 1,000 properties being built for rent and coming onto the market in September, just when you are looking to rent your property. It’s likely this could reduce rents for a while, so a wise investor would make sure they already have a tenant in prior to these new properties being released.

Investors looking to expand their portfolio should be double checking whether any properties they intend to buy are near build to rent sites too.

However tenants will find that unlike individual buy to let investors, they will see rent increases in line with inflation plus a bit extra. Most small landlords don’t tend to increase rents for existing tenants, so it’s quite usual for someone to be renting for £800 a month if renting for five years when the market price is actually £1,200.

As such tenants will find whether their wages increase or not, they will see consistent rent rises.

How many homes will be built?
Current estimates are that there are 16,000 build to rent units in the pipeline in London alone, with 29% of all starts in Q1 being for rent in this way. And there is plenty of money waiting in the wings to invest, estimated at £30bn.

Which schemes are already up and running?
The biggest player so far is a company called 'Essential Living'. They are based on London and they already have eight schemes across the South East, hoping to build 5,000 properties for rent.

For more about what’s happening with Build to Rent, visit the .gov website - Build to Rent: guidance and allocations

For guidance on renting visit Propertychecklists' information for tenants.

For guidance on buy to let investment visit Propertychecklists' information on buy to let.

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