Build to rent: the obstacles for housing providers

When delegates gather in Manchester tomorrow for the start of the Chartered Institute of Housing‘s annual conference, there will no doubt be talk of build to rent, the government fund to stimulate new private rented housing supply and attract institutional investors.

Registered providers are looking for new ways of attracting capital into housing and build to rent carries with it the promise of institutional investment. Government too is resting a lot of hope on build to rent to increase supply and meet growing demand from those who cannot afford to buy their own home. But getting build to rent right will be a challenge for all housing providers – and a particularly tricky one for registered providers.

The challenge of build to rent stems from the fact that we have so little purpose-built rental accommodation in the UK outside of social housing. Most private rented stock comes on to the market because it cannot be sold or because it stops being owner-occupied and becomes a buy to let property.

As a result, the sector’s intelligence about the real costs of purpose built market rent involves a fair amount of informed guesswork. This is problematic because costs ultimately drive investor returns.

Getting the costs right is critical to getting build to rent off the ground.

Understand the demand

Providers need to get better at identifying areas that can sustain long-term rental demand. This does not mean focusing only on London and the south-east. Our work with six housing providers suggests that it is more about picking the right places within regions based on who the target tenants is.

There is also a need to develop a better understanding of what different tenants want from a bespoke market rented product and how this relates to rent levels and construction costs. Built assets experts such as EC Harris estimate a 5% reduction on the costs of development for build to rent compared to build for sale, but concede that there is little hard evidence to corroborate this.

Uncertainty over management costs

The viability for investors of any build to rent development is highly sensitive to assumptions about management costs. Our analysis suggests that a 10% fall in management costs would drive around a 0.1 to 0.2% increase in net yield – which can be the difference between an attractive investment proposition and a non-viable one. But benchmarking these costs is challenging given the paucity of comparable industry data. The International Property Database is the largest database of private rental properties but old stock, fragmented ownership and a heavy concentration in high-cost markets in London and the south-east make it an imperfect guide for build to rent.

The impact of longer tenancies

A similar issue exists with longer tenancies that housing providers are looking to offer for build to rent properties. If tenants sign up for three or five years at the outset, what impact does that have on the costs of voids?

Strict regulation

All the above are issues for any provider seeking to develop build to rent. Registered providers, however, face the additional complication of how build to rent fits within their core organisational purpose and for some, charitable status. This is more than an identity crisis for the sector. The current consultation on the regulatory framework for housing associations could seriously limit their scope to drive forward build to rent. Understandably, the regulator wants to protect the public assets that these organisations have built up. But imposing a strict ringfence between core social housing activity and market-based developments will wipe out the sector’s advantages that stem from the strength of their corporate covenant.

Having found an additional £750m for the build to rent fund in this year’s budget, the chancellor should be concerned that the regulator may choke off large parts of the sector before the first contract for the fund has even been signed.

This article originally appeared on The Guardian’s Housing Network blog