At face value, high quality purpose-built units – complete with gyms, communal areas and concierge services – would appear to offer what the rental market has long demanded.

Whilst still in its relative infancy, build to let and co-living is no longer simply theorised at property conferences – it’s now the real deal, growing at a notably accelerated pace.

Savills estimates that some £15.6 billion has been invested in the sector over the last 6 years, a figure which Knight Frank believes could increase five-fold by 2025.

So what differences will built to let bring, and does it herald any significant threat to SME landlords?  PRS landlords and quick homebuying company Property Solvers delve into the topic…

What Will Build To Let Involve?

It’s likely that build to let projects will become attractive for a select sector of investors. These will usually be institutions and pension funds seeking out projects with stable income streams and, secondarily, long-term capital gain growth prospects.

It is these high-powered companies that are more likely to invest in build to let at a larger scale.  The field is considered relatively risky so financial strength is key. These projects are based on a very new business model and teething problems in terms of management and economic viability are likely.

As something of a backlash against the rental sector’s reputation for failing to deal with complaints in a timely manner and providing a poor standard of service, build to let properties are seemingly prioritising quality and the “customer experience”, including security of tenure.

Within a favourable operational environment with top-down support, to date, the majority of these projects are London-centric – where land values and build costs render projects unviable.

Gradually, though, build to let is spreading its wings as it heads to the regions – most notably Manchester, Birmingham and Leeds. Rural parts of the UK and the more peripheral areas of urban areas are, as of yet, relatively unaffected.

Gyms, games rooms and social spaces are commonplace within these developments, as are concierge services and other conveniences. Many of these purpose-build properties are designed with a social atmosphere in mind in order to combat the reported loneliness that can be connected to city living.

The goal of many build to let projects is to respond directly to the requirements of today’s renters in terms of contemporary priorities such as mental health and energy efficiency. They cater to those who rent as a choice, not an obligation, and therefore demand higher standards.

The Case Against Build to Let

The levels of investment in the build to rent and co-living fields contrast heavily with the state of the traditional rental sector, which has recently witnessed a spate of onerous cuts and updates to regulations and legislation. 

Section 24 represents the tip of the iceberg – not to mention the impact of new borrowing restrictions (more stringent stress-testing criteria) and stamp duty surcharge across all second property purchases.

These issues have led to many landlords – possibly as much as 4,000 a month according to government statistics – either exiting the sector completely or having to cut back heavily on the ambition of their ventures and reducing their levels of gearing in order to adapt.

Is It As Bad As It Seems?

The financial hardships facing most landlords may occasionally be overstated. Approximately 65% of rental properties are owned mortgage-free – and most landlords operate at sensible gearing levels, particularly across many areas of the south.

This makes any threat arguably hyperbolic.

Indeed, many landlords have simply sold out to release the accumulated equity rather than as a result of pressure from new regulations. 

What Might We Lose With Build to Let?

It is very possible that build to let investors will take a more corporate approach to their interaction with tenants – replacing one-on-one telephone conversations and emails between renters and landlords with centralised call centres that may not be onsite.

The flexibility of the traditional landlord may also be replaced with automated systems and tightly managed processes, resulting in less flexibility.

Affordability, too, may suffer. Build to let may provide less scope for shared housing options, meaning cost-conscious millennials may be put off – particularly those intending to save for their future.

It’s generally less common for landlords renting privately to be called out publicly for mistakes and oversights, as problems are often resolved between the property owner and the tenant. 

However, build to let investors are likely to rely heavily on their online reputation, and may face considerable difficulties should they become subject to poor reviews.

What’s Next?

With the growing spectre of better all-round provision meaning that landlords cannot rest on their laurels, it’s worth bearing in mind that the UK has 2 million property owners within the rental market alone who collectively own 5 million properties. 

Assuming that the above estimations are correct – and that will be no sudden growth of new private rented properties on the market – we calculate that 3.2% of gross rental housing stock currently will belong to the build to let sector by 2025.

Rising net build costs require higher revenues to deliver an acceptable yield level – particularly in the wobbly London market. Excessively pushing up rent is simply not possible, especially if tighter rent controls were to ever come to fruition.

However, although comparatively nascent, sectors such as social/affordable housing – perhaps most significantly pioneered by the likes of Sigma – have been gaining interesting traction.  It will be interesting to see how this sector develops in the coming years.

The Future of Rent

Times are uncertain within the wider property sector, and this rubs off significantly on its rental branch.

With the UK population still gradually on the rise, demand for more housing will not decrease. However, due to recent legislation, it is likely the rental sector is now being held to account and challenged to meet this demand in a safer manner.

HMO slumlording, for example, has been the subject of a significant crackdown, as has the standard of student housing. With more and more negligent landlords being brought to light, tenants are now more demanding than ever.

It is becoming gradually more vital for rental housing to be affordable. To begin with, there is considerable uncertainty regarding the long term effects of the UK’s departure from the EU. 

On top of this, a third of the UK’s two million-strong population of millennials will probably live in rental accommodation for their entire lives. This generation tends to earn less – plus, the number of its members with access to supplementary funds from “the bank of mum and dad” is falling.

In order to support the growing trend of the transient lifestyle and “cradle to grave” renting, the option for longer tenancies has been discussed. Minimum three-year contracts with six-month break clauses may offer more security for both renters and landlords.

However, whether or not this is an entirely beneficial approach depends on the outcome of any change to eviction legislation – as if tenancies are generally longer and evictions more difficult to execute, landlords may find themselves stuck with nightmare tenants for considerable periods.

Build to let property investors are more likely to be tougher on their tenants when it comes to reserving the right to evict – as opposed to the more traditional “mom and pop” landlords.

It’s our view that the rental property market will continue to become more professionalised as a result of the growth of the institutional PRS growth.  Although more smaller landlords may exit, there’s still plenty of space for all operators within this field and, indeed, an opportunity share ideas for best practice.