Build To Rent: Tenant poacher or happy bedfellow?

Paul Stockwell, Chief Commercial Officer

The sand has been shifting so much under the feet of private landlords that many may believe they are becoming an endangered species.

They are penalised for buying properties, can’t offset as much tax as they used to and, in many areas, have to register with their local authority.

Given this, you may think the last thing landlords need is more competition.

Enter Build to Rent — the mega-landlords of the modern age who are usually managed by banks, private equity funds, insurance companies and hedge funds, creating tens of thousands of new homes en masse.

Global investment to the tune of £70billion is expected to be injected into the sector up to 20221, and there are more than 139,000 properties either already delivered, in the planning or under construction2.

But has the stage really been set for a David and Goliath struggle? Not really.

In fact, rumours of the demise of the private landlord have been somewhat overstated. Believe it or not, banks actually want them to succeed.

Currently, one in five homes is a privately rented property3 and this is likely to increase to a quarter in the coming years. Landlords might have had their margins squeezed but they are still have a vital role to play in the UK housing market.

Banks involved in the Build to Rent sector can see two very different markets emerging – the traditional private landlord and the Build to Rent operator.

The Build to Rent model focuses on maximising net operating income by providing tenants with additional perks, with desirable extras include gyms, cinema rooms, concierge and communal lounges - compensated for by a premium of up to 20% on local market rents. Build to Rent funds are also less interested in capital appreciation. Investors including pension funds are attracted to Build to Rent by the relative granular, long-term, and predictable private rented sector to meet their pension liabilities. Tenants get the security of tenancies which last up to three years, no deposits, free furnishing options, community events as well as local offers and promotions.

On the flip side, most private landlords have small portfolios and are motivated more by long-term capital growth and rental yield. Their offering is more standard and this appeals to a different type of tenant.

Young people have a diverse range of future plans. The attraction of independence may be enough to encourage them from their family homes but many still have aspirations of saving for their own home. These tenants are probably less likely to choose Build to Rent developments, which are aimed at an emerging group of young people with a more continental attitude towards renting. Far from perceiving it as a financial drain, they see it as a lifestyle choice.

A good example of the new Build to Rent model is East Village, Stratford, where 1,500 former Olympic village homes developed by Delancey and operated by Get Living London offer tenants free furnishing options, customisable interiors, an “app” enabled access and no deposit required.

This is why the private landlord model is still sustainable as there will be many tenants who don’t want to pay a premium for an enhanced service.

As larger scale long-term investors enter with branded platforms, a choice of developments and higher levels of customer service, a two-tier market will likely emerge. Private landlords will come to occupy the very worthwhile position of budget airlines — no frills, low price, a stepping stone.

The ultimate benefit? There’s more housing stock whatever kind of tenant you are and Build to Rent remains attractive enough to investors to keep up the pace of building, which is one of the UK housing market’s most fundamental problems.

1Ministry of Housing

2British Property Federation

3English Housing Survey p.6

This blog was featured on Specialist Banking.