Last week the British Property Federation (BPF) announced that over 20,000 build-to-rent (BTR) homes were in planning, under construction or completed. You would think that this would be good news in a country with a shortfall of approximately 120,000 new homes per year. Yet the announcement’s cagey media reception reflects cautious market sentiment.
On the surface, the build-to-rent sector would seem to be a win-win proposition for all sides.
Large institutional investors can see the promise of stable long-term returns, mirroring the recent success of the student accommodation market.
The government is wary that the current private rental market is dominated by amateur landlords. Many have high levels of debt, delivering historically low yields, and offer poor service to tenants. Institutional investment could bring greater professionalism and maturity to the sector.
Large fund managers have the financial firepower to deliver the transformational investment needed to tackle the housing crisis.
This should be good news for ordinary people up and down the country who are struggling to find suitable housing,
What’s more, a move towards the Private Rented Sector (PRS) away from home ownership fits with the zeitgeist of today’s urban millennials.
Young people have embraced the shared economy in every aspect of their lives. They don’t buy DVDs or music anymore since they can subscribe to Netflix and Spotify. They don’t own cars; if they feel the need to learn at all then they increasingly use ZipCar and DriveNow.
Why wouldn’t millennials have the same attitude to housing?
And yet many investors and developers are wary.
Some of their concerns are inevitable and cyclical. Interest rates are the most obvious example. Many are reluctant to make big new bets in a market suffering from short-term volatility.
Yet there is also a clear sense of political risk. In the past few months the government have floated changes to housing associations’ funding arrangements that turn their business model on its head. It is amending the tax relief arrangements for private amateur landlords.
Stability in the regulatory environment is an understandable concern. It also reflects the political landscape.
The government knows that the rented sector has an important place in the housing market. It actually runs a £1billion fund to supported BTR development. Yet in the current political climate they see no reason for their rhetoric to match reality.
In his recent conference speech, David Cameron explicitly linked home ownership to aspiration and stability. The implied contrast with Labour couldn’t have been clearer. The unwritten truth that homeowners tend to vote, and tend to vote Tory, underlies his political calculations.
So what are wary developers and investors to conclude? When judging the opportunity of BTR and the PRS, what is signal and what is noise?
The answer must be to look at potential customers. Who will live in any new homes?
According to one poll from earlier this year (Survation / Generation Rent – February 2015) 57 per cent of people said they, or someone they knew, was having problems buying or renting a suitable home.
Clearly, then, underlying demand is strong. With the current shortfall in housebuilding rates, that is not going to change anytime soon.
The real challenge to investors and developers lies in the political and media landscape. Housing is an emotive issue for the electorate, a divisive one in politics and a staple ingredient of national and local news. Effective communications will be vital for those looking to navigate that delicate path and realise the huge potential presented by the BTR sector.