Build-To-Rent: Why Sell if You Can’t Find Another Property to Buy?

Many people I have spoken to over the years say that their biggest property regret is the properties they have sold. Whilst it may be true to say that you can’t keep them all, with property remaining a good hedge against inflation and having the ability to provide an income, you can easily understand this comment. Indeed, many investors I speak to say they are struggling to find stock to buy. With this being the case, surely there is an argument that you shouldn’t sell the stock you have?

BTR offers the sensible alternative and also provides the developer with a number of clear benefits.

New-build in the rental sector has the advantage of being compliant from the outset. There will be full building regulation compliance with energy, sound, fire precaution and other key requirements being absolutely up to date. There will likely be reduced maintenance and repair costs in the early years and in addition the property will command a premium rental when compared to existing dwellings in a similar locality.

From your tenant’s perspective, they will enjoy brand new fittings, improved energy efficiency resulting in lower utility bills and presumably a very pleasant environment in which to live. This should doubtless result in the longevity of the tenancy.

Statistics suggest the average tenancy is around two years. From my own experience I would tend to agree with this, although where people have moved into my properties following a full refurbishment, the average tenancy is just over five years. This has a very positive impact on the income that you will derive, given that you are less likely to sustain void periods and repeating letting agency fees to source new tenants.

With interest rates remaining at very low levels, there is an opportunity for the developer to procure sensibly-priced long term finance and see a real return on their investment whilst retaining the underlying asset.

Whilst there are large scale BTR schemes being undertaken, such as the 7,600 home scheme at Wembley Park due to house 15,000 people, these schemes work on the basis that the rental charge includes utility costs as well as communal facilities such as games rooms, gyms and concierge. Some of the larger schemes offer below market rents in return for initial subsidies.

These more substantial schemes established themselves principally following the launch in 2012 of a series of government initiatives to increase the supply of high quality homes available for market rent in the private sector. Indeed, further schemes are currently being undertaken by firms such as Quintain, as well as the Duke of Westminster’s property firm. These are likely to attract young professionals who need to be in city centres and who appreciate the all-inclusive cost element.

Notwithstanding, there is also scope and considerable demand for smaller scale schemes, perhaps more suited to families, and that it is something you may wish to consider.
In terms of smaller sites that may be suited to this strategy, it could be sensible to look for opportunities to redevelop compounds of lock up garages, former commercial sites or other brownfield sites where a reasonable density of housing could be achieved.

Some of the regional development firms have decided to switch from building for sale to building homes for rent because they can provide a reliable long term income stream in contrast to the ups and downs of the traditional housebuilding cycle. Furthermore, government support for – and investor interest in – BTR has increased over recent years. The gentleman who spoke at the event I attended was Lloyd Girardi, who is featured in this issue of YPN. He has recently constructed one scheme of 11 houses and another scheme of eight houses. Both, he reports, were swiftly 100% funded via an online crowdfunding platform and then remortgaged onto a term loan on completion without any significant headaches.

As an exercise why don’t you run some calculations regarding the last couple of properties that you have either built or refurbished and subsequently sold, and see what the current position would be, making appropriate allowance for both the income in the intervening period as well as the capital growth, if you had retained them?

In closing, I would suggest that you should not be frightened that the large developers are getting so heavily involved in BTR, as I am sure there is sufficient tenant demand for us all to benefit. Home ownership is at its lowest level for some years and there is a seemingly insatiable demand for rented accommodation. By providing good quality, newly created units, tenants may be increasingly happy to reside in rental homes and retain the increased mobility and flexibility that they would otherwise sacrifice if they were owner-occupiers.