Build to rent - is it worth it and where can you find properties?
Property expert Kate Faulkner explores the benefits of build to rent and shares her tips for finding properties.
- What is build to rent?
- New builds to rent: investment benefits
- Build or convert to let?
- Potential build to rent pitfalls to avoid
- New builds to rent: your team
- Build to rent - the verdict
What is build to rent?
Build to rent is the building of homes specifically for the rental market, rather than for sale. The vast majority of developments are owned by institutional investors - property, investment or pension companies - but there is absolutely no reason why private landlords can't embark on their own build to rent projects.
As tenants look for better quality homes and a higher level of security, particularly in city centres, this kind of investment is providing new-builds tailored to tenant demand.
Around 80% of build to rent projects are currently in London and other major cities, locations where population growth is concentrated and affordability tends to mean home ownership is harder for younger people. As such, it's a rapidly-growing market.
New builds to rent: investment benefits
The main benefit of building a property, if you have enough capital available and are able to get the appropriate financing, is the initial overall cost is significantly less than if you were buying that same property already built. That means:
- The yield and return on your investment can be higher.
- There may be less stamp duty due, as it is only payable on the price of the land. (While larger-scale projects may attract the 15% corporate SDLT rate, smaller private developments could make savings) Always speak to a property tax specialist to confirm what your liability might be.)
- Depending on the scale and location of what you're planning to build, you may be able to apply for a government loan or grant.
- When the build is completed, you may have a significant amount of equity.
Because you are starting with a 'blank canvas', you are able to provide exactly the kind of accommodation that is in demand. Assuming you meet all the needs of your target tenants, you may even be able to let rental units at the higher end of current market rents.
New builds also have the ongoing benefits of:
- Warranties and guarantees on the building works and various fittings
- Less maintenance, certainly for the first 10 years
- Being more energy efficient, if the construction uses the most up-to-date materials. That's good for the environment and good for your tenants' bills
- Being safer, as all the latest fire and security measures can be installed
You could hold, let and manage the property yourself. Or you may find - if you build multiple properties - there are institutional investors interested in buying the lets from you, once established, giving you a lump-sum profit.
Build or convert to let?
While 'Build to rent' generally means building a new property from scratch, the principle could also be used to refer to 'converting to rent', where you take on relatively major works to repurpose an existing property. As an individual landlord, this option may be more viable for you, in terms of convenience, cost and speed, particularly if you've gone through the traditional buy to let process before.
5 options for investing in build to rent
- Find an individual plot of land and build a property yourself - you can source plots online via specialist companies or simply through local networking.
- Find a plot of land and partner with another company or investor who will build on it.
- Find a commercial property that could be converted into residential units - this could be done under permitted development rights or you will have to apply to the council for planning permission.
- Turn a large residential property into flats (also requiring planning permission).
- Buy a property to let and put a second 'build to rent' on the plot.
Potential build to rent pitfalls to avoid
With any new build, there are numerous things to be aware of, consider and comply with, so that you don't fall foul of the rules and regulations. When it comes to build to rent, there are even more potential pitfalls, so it's important you do the following to help ensure your project is a success:
1. Research the demand
Void periods, where rented properties are empty, can impact very heavily on your profits, so you must make sure you're building in a location where demand is high and likely to remain that way into the future. This is why build to rent is so successful in major cities - there will always be a stream of young adults that have come to study or work and either can't afford to buy or simply don't want to at this point.
Speak to local agents and research online to find out exactly what standard of accommodation and facilities are expected, to make sure you don't miss anything.
2. Planning
You really have to do your homework at the earliest stage, to make sure you don't end up with a plot or property that you can't build out or convert as you had intended. Speak to your local planning department to find out their policy on granting permission for new builds or change of use, and the criteria you will need to satisfy (style, size, access, etc.)
3. Building regulations
Your build will have to follow strict processes and meet certain standards, many of which will be time and order sensitive. The best way to avoid any issues here is to use an architect and project manager who are both familiar with the local rules.
4. Health & safety regulations for legal letting
Because you will be letting the property, rather than building and living in it yourself, there will be specific additional considerations for the design and build, which could include:
- Fire safety measures, such as windows that open fully for escape and an integrated alarm system
- Minimum room sizes, which will apply if the property is considered an HMO
- Soundproofing between units
Again, experienced architects and builders, together with local authority advice, should ensure the criteria are met.
5. Getting the right contractors
Choose contractors that are members of recognised industry bodies and associations, so you can be confident they are properly trained and insured, and you have some kind of recourse if there are problems. Also, make sure they have experience in this type of project. If you have a good local network of landlords and other property professionals, it's worth getting recommendations.
6. Certification
You should have:
- building regulations and planning sign-off from the council
- warranties and guarantees for the new build itself
- warranties and guarantees for various fittings, such as shower units and white goods
- health and safety certification for letting, relating to gas, electricity and energy performance
7. Sticking to your budget
It's very easy to go over budget on a build or conversion, particularly if it's your first project. Some of my tips for staying on track are:
- Work closely with your architect, ensuring they are very clear on your overall budget
- Make sure you understand where you can and can't compromise on price
- Use a project manager and give them the responsibility for bringing the build in on budget
- Ask contractors to provide quotes for an overall job cost, with an upper limit
- Always ask for discounts from suppliers for bulk purchases - e.g. if it's a block of high-end bedsits, you should be able to get a good deal on televisions and white goods for all the units
- Regularly review the actual costs-to-date versus the budget with your project manager
New builds to rent: your team
Given the practical, safety and legislative criteria you have to satisfy, there are a number of professionals you can and should call on to help with your project:
- Planning consultant - this is someone who knows the national and local rules and regulations and can put together planning applications on your behalf - whether that's for a brand new build or change of use. They will work closely with your architect and advise on what you can and should include in your build to give it the greatest chance of being granted planning permission.
- Architect - try to choose someone who has experience of build to rent or rental conversion projects, so they know the rules and requirements that are specific to letting.
- Surveyor - if you are making major changes to a property, you should have a building survey.
- Local council housing department - while they aren't really 'on your team', it is a good idea to become a familiar face in the council offices, to demonstrate that you're keen to provide housing solutions for the area. Find out where they see gaps in rental supply and what kind of projects will help them. Even if you use a planning consultant, it's helpful for you to know about the local council's policies and approach yourself, particularly if you're considering more than one project.
- Project manager - this is someone who looks after the day-to-day running of the project. They will usually build you a team of contractors - generally people they have worked with before - and will deal with any on-site issues on your behalf. You should work closely with your project manager to make sure the cost and timescale stay on track. Not only is it a good idea to have an experienced professional at the head of the project, it can also save you a lot of time and even money.
- Contractors - if you are using a project manager, they may take responsibility for the team themselves, but you should always make sure that any contractor on your site is a member of a recognised body, such as the Federation of Master Builders, the Chartered Institute of Plumbing and Heating Engineering or NAPIT. Make sure to check that they are properly insured for the works they are carrying out.
Build to rent - the verdict
As long as you plan and budget properly, follow the right procedures and use a good team to achieve a successful build, built to rent can certainly be a very worthwhile investment. In the short term, you should see good cash flow from rents; in the medium to longer term, there may be attractive increases in capital values.
Because it's tailored to a specific tenant market, you should be able to let the accommodation quickly and, because it's brand new, maintenance issues for the foreseeable future should be kept to a minimum.
Sources
https://www.bidwells.co.uk/insights-and-research/blog-what-is-build-to-rent
http://rg-group.co.uk/what-are-the-pros-and-cons-of-build-to-rent
Kate Faulkner is one of the UK's leading, independent property experts and regularly features in major newspapers, on the BBC and ITV, as well as regularly co-hosting the Property Show on LBC.
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Kate Faulkner
Added: 5 Jun 2019
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