Why property developers and tenants could be the poor relations in build-to-rent
The UK’s private rented sector (PRS) is growing at a rapid pace. Today, around one in five households are in private rented accommodation, and this proportion is expected to grow to one in four by 2025. Within this sector, investment in build-to-rent is expected to almost treble in the next five years. But what are the advantages and disadvantages of focusing on build-to-rent development?
Build-to-rent has the potential to step in where government and local authorities cannot. Money from large investment firms provides the financial impetus to increase the supply of homes and tackle the UK’s housing crisis. The government has recognised this potential and has started to invest heavily. Already it has created a £1 billion Build-to-Rent Fund (B2R) and hopes to unlock billions more in investment to create a better private rented sector.
For institutional investors
For large investment funds, the private rented sector is attractive. They are awash with cash and investing in a sector that is growing and provides good, steady yields are, perhaps, a no-brainer. PRS funds could offer their investors a steady stream of income without the need to become landlords in their own right.
Tenants should benefit from renting from a single professional property manager, rather than an individual landlord. Further, purpose-built rental blocks often offer residents extra amenities, such as gyms, study areas, and communal lounges and gardens. Perfect for the lifestyle needs of young professionals.
For developers, the potential to sell a whole development to a single institutional investor removes much risk. This should enable the building of new homes to be ramped up. However, there is a price to pay for this perceived reduction in risk. Lower risk walks hand in hand with lower rewards. Institutions drive hard bargains to take up whole developments for build-to-rent. Property developers’ margins are reduced, and that leaves less to invest in the next development.
Is build-to-rent the solution to the UK’s housing crisis?
There are also questions being asked about build-to-rent’s ability to be the solution to the UK’s housing crisis. The crux of the issue facing the UK is both numbers of homes available and their affordability.
A study by JLL found that there is an average 11% premium on rental prices in properties in build-to-rent developments in London. To fix security of rental income, many of the property management companies running build-to-rent blocks require their tenants to have a high rent to income ratio.
In summary, the build-to-rent sector may not be the solution to the UK’s housing crisis that many expect it to be. Tenants must be high-income earners and pay a premium to other rental properties – working against the government’s policy of creating affordable housing. While institutional investors drive hard bargains and create strong income streams, build-to-rent could also reduce the margins of property developers, hampering their ability to build more in the future.
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