Build-to-rent: how we helped to deliver a new asset class

COMMENT It is 10 years since the Montague Review was published into how the UK’s private rented sector could be improved. I was the new housing minister at the time, and I was keen to see how we could build more homes and modernise renting in this country. It seemed to me that the PRS needed to change. Buy-to-let landlords were focused on capital gains and leases were short. The quality of housing stock was worse than either the social housing or the home ownership markets. If we could attract institutional investors – patient capital – to build modern homes to let, we could increase supply, offer better conditions and give tenants greater choice. We would legislate to tackle bad practice and root out rogue landlords. However, government also has a role in partnering with the private sector, to encourage sustained investment. Gaining confidence We began the process with three steps. First, we created a dedicated £1bn fund to nudge private investment. Second, we established a task force of experienced property professionals to unlock development, working with both private and local authority partners. Third, we created a £3bn loan guarantee scheme for the sector, mirroring the scheme in place for affordable housing. Initially investors were hesitant but gradually the market gained confidence. The sector is now one of the most active across all real estate markets. Savills’ most recent research shows that some £30bn has been invested, with 75,000 homes built and another 50,000 under construction. The sector attracts a wide range of investors and developers. Around 120,000 homes are in the planning pipeline which, if built, would double the market’s stock. On current trends, Savills estimates that over the next 10 years the BTR sector will extend to 380,000 homes, worth approximately £170bn. The tenants are changing as well. Although young professionals remain a key part of the market, tenants now include many more families, people in their 40s and 50s, and those in retirement. Roughly a third of renters have chosen three-year leases, far more than the wider rented sector. Interestingly, BTR is appealing to a wide band of incomes, with 27% of residents earning between £26,000 and £38,000. But it is not all positive. Build cost inflation and higher interest rates are making some projects unviable. The mood in private equity has become quite bearish about the UK’s prospects. It is uncertain if this will rebalance or whether those funds will withdraw from the market. This is, in part, because although it is clear that overall household incomes are going to fall over the next couple of years, it is not clear how this will affect BTR rents. After all, demand already outstrips supply in the private rented sector and the lesson from past recessions is that demand for renting always increases. Data and planning The sector is clearly maturing. We are seeing greater differentiation between brands, not just on price. This reflects an increasing realisation that, fundamentally, this is a consumer business, with good service at its heart. A good site manager who renters trust to sort out problems is highly valued. A second shift has been accelerated by the Covid-19 lockdowns. Shy Brits have come to value knowing their neighbours. I am told this has encouraged more tenant-led socialising, which in turn encourages people to stay. It is early days but it will be interesting to see the statistics on churn in due course. What else needs to happen to improve the sector? I would highlight two aspects – data and planning. At an excellent session led by the British Property Federation recently both issues emerged. We need good, independent sector data, with robust indices for performance. At present the data is often incomplete. Second, we need to establish the sector clearly in the planning system, not least the National Planning Policy Framework, and to educate all planning authorities about the value the sector can bring to their community. I know the BPF is already banging the drum on this – and we all need to get behind that. As a politician it is rare you can point to something lasting from your time at Westminster. Helping establish a new asset class which delivers more and better homes to rent is something I take pride in – even if I was only the midwife. Mark Prisk is a former housing minister Picture © Mark Prisk