Build-to-let – the next big thing?

The Financial Times reported recently that owner occupation in the UK has fallen from 71% in 2003 to 63% currently. With mortgages difficult to get and house prices constantly rising, “generation rent” doesn’t look as though it will be comprised of homeowners any time soon.

And in response, a new type of landlord is entering the market. Private investors are financing the construction of affordable new homes without any intention of selling them on. Instead they want to keep them as long-term investments. Some of these schemes involve entire housing estates and much of the construction is in the North of England.

The developers include companies such as Sigma Capital, a housing developer backed by various finance groups including the Islamic bank, Gatehouse.

This trend may change the structure of the rental market in the UK. In the recent past, only social landlords such as housing associations and local councils, have been building affordable homes for rent. Strict criteria for getting these homes have meant that many people have been left outside the subsidised rental sector and have instead rented privately from landlords.

These landlords often hold just a few properties, perhaps as part of a retirement plan. Typically, they rent the property out and leave the tenants to pay the gas, electricity and any other utility charges.

The model being used by developers such as Sigma is different. In their properties, the monthly rent includes a charge for all utility bills and there is also a contribution towards some maintenance items, such as having the grass cut periodically in those properties that have gardens.

Sigma has a partnership with the house builder Countryside Properties which has built over 600 homes purely for rental and is expecting to deliver another 550 during 2017. Countryside Properties has focused on northern cities where local councils are receptive to the idea of private companies building housing on the large land banks held by the councils.

The properties being built by these investors and developers are not, as you might imagine, blocks of flats aimed at students and single people. Many of them are family houses and a significant percentage of Countryside’s properties are situated next to housing of exactly the same design that has been built for sale to homeowners.

Currently, a house on one of these schemes, with three bedrooms, will achieve a rent of £700-£800 monthly. Four-bedroom homes go for about £1100 a month, but that includes house insurance and all utility bills. The houses would cost roughly £210,000-£225,000 if they were bought on the property market.

Nor are the people renting these homes necessarily short of money. Because it is cheaper for people to rent than to buy, the tenants tend to have more disposable income. Graham Barnet, chief executive of Sigma, points to the cars sitting on tenants’ driveways as a sign of their prosperity.

It is possible that the availability of new rental stock on well-maintained estates, may raise standards across the board, as small landlords have to compete with these larger schemes and tenants. Certainly the model of the all-inclusive rent is being adopted by some landlords because it means that they don’t have to constantly deal with changes of account and possible defaults on utility bills.

And the trend for building rental properties shows no sign of abating. British Property Federation statistics are showing that the number of rental properties in progress or newly completed, has risen to 57,000 from 21,400 with significant developments in the North of England.

Stonegate Developments has a scheme for 162 new rental apartments in Newcastle and there are a minimum of 28 build-to-rent schemes planned for Manchester alone, according to the figures released by the BPF. Any letting agency in North Manchester will confirm that the demand for rental properties is there.

Across the country, Sigma is intending to build another 10,000 homes to rent in the next five years, concentrating on development sites that have good transport links so that commuters will find the properties attractive.

Certainly, if tenants get used to the idea of an on-site maintenance service which some residents of the new purpose-built developments are now enjoying, they may become rather more demanding tenants than those which private landlords are used to.

It will be interesting to see what effect this new development has on the Manchester lettings market.

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