After a slow start ‘Build to Rent’ is starting to pick up momentum in the UK. According to the British Property Federation, build to rent homes completed in the UK is up 30% this year and it just been announced that Edinburgh-based Aberdeen Standard Investments has launched a European Residential Property Fund to “invest in the residential sector on a pan-European basis, taking advantage of low supply and high demand for quality rented residential property in Europe’s leading cities”. The fund is intended to grow to above EUR1 billion over the next five years indicating Aberdeen Standard Life’s confidence and ambition in this sector. B2R is seen by the UK and Scottish governments as a key piece of the jigsaw to solve the housing crises (The Scottish Government launched a Rental Income Guarantee Scheme where the Government shares developers rental income risk).
What is Build to Rent? – Build to rent (B2R) is the model whereby one landlord (normally a pension fund) will build and hold a large block of apartments on one site. The apartments are let out to tenants, instead of being sold off one-by-one as was the traditional model in the UK. The B2R model is much more common in mainland Europe and the U.S. where buildings are owned by one landlord and let out to tenants. Funds maintain ownership in the hope of steady returns over the lifetime of the building(s), or until they sell it off to another pension fund in the same way as tenanted office developments and industrial parks are traded. A build to rent scheme will benefit from more amenities than a standard residential block including things like concierge, gyms, cafes, onsite maintenance, common lounges and shared rooftop gardens. An example is the Athlete’s Village in Stratford in London which is Build to Rent ‘on heat’ and is a thriving community commonly managed and offering tonnes of shared facilities and amenities; it’s worth a trip!
So what does this mean for Buy to Let Landlords? – Surely an influx of modern, all-singing, all-dancing properties coming onto the rental market will pose a threat to buy to let landlords? Well, looking at Edinburgh specifically, I don’t think so and here’s why;
Property supply has such a long way to go to catch up with tenant demand – This is easiest to illustrate with some snappy stats;
- The UK Private Rented Sector is now 5.7 million households and, according to PWC, is expected to grow to 7.2 million by 2025
- The Scottish PRS has more than doubled in size in the past 10 years and continues to grow
- Edinburgh’s population is growing fast with 620,000 expected to live in the city by 2037 (currently it’s just over 500,000 people)
- Rents in Edinburgh have climbed 30% in the last 5 years as demand outstrips supply (Citylets Q1 2018 Report)
- Average rent in Edinburgh is £1,062 pcm (Citylets Q1 2018 Report)
- Average time to let in Edinburgh 27 days (Citylets Q1 2018 Report)
Different type of tenant – On the whole, a different type of tenant will be attracted to B2R accommodation. B2R schemes attract a more transient tenant who is perhaps not native to Edinburgh and doesn’t have an established community and routine in the city. People local to Edinburgh will have friends or their own routines based on location of things like work, the gym, favourite park so will have their own expectations of where to live, whereas someone moving to the city for the first time might prefer to rent within a B2R development which offers them a ready-made community and amenities. With nationwide B2R brands growing, transient tenants will know what to expect from different schemes as they move around the UK, taking an element of risk out of letting (standards of property/landlord/letting agent vary so much within the Private Rented Sector). I can see the attraction myself if I was moving to a new city. A good comparison is looking at the Purpose Built Student Accommodation market (PBSA – B2R has often been described as PBSA for ‘grown ups’). We’ve seen a huge rise of privately owned PBSA schemes in Edinburgh over the past 10 years, filling a much-needed gap in student accommodation in the city. Even with the massive influx of student beds in recent years, this has in no way slowed down demand and rental growth for traditional student flats in areas like Marchmont and Newington. PBSA suits some students while traditional rental properties suit others.
B2R helping clean up areas – The emergence of B2R is helping regenerate areas. This pattern is happening all over London including around Stratford, Wembley Park and Ealing, bringing a new lease of life to areas. This inevitably has a knock-on effect to rental and capital values in the surrounding areas. The same is in store for Edinburgh; concentrating on Fountainbridge, 10 minutes’ walk from a lot of Edinburgh’s Grade A offices around Morrison Street and Lothian Road and on the right side of the city for Access to Napier and Herriot Watt Universities, this district is in need of a long-overdue facelift to develop gap sites left behind when the Breweries and printing industries moved out of town. Fast forward 5 years, once the Moda Living development (5oo+ homes) is up and running and the site which may-or-may-not-be (!) known as India Quay has been developed the area will have a new-found buzz and community that can only benefit traditional buy to let properties in surrounding areas. It’s a no-brainer that a property on St Peter’s Place or Grove Street will be worth more on a capital- and rental-basis once the ugly gap sites are filled with swanky looking apartments, bars, restaurants, cafes and buzzing green spaces.
Edinburgh’s population continues to grow, attracting new people through our growing Universities, growing businesses (within tech, fintec, financial services and tourism) and through the quality of life the city has to offer and there just are not enough homes to go around.
…In conclusion – I don’t think buy to let landlords in Edinburgh have anything to worry about with the emergence of B2R. B2R schemes will offer tenants the choice of ‘clean’ living spaces which can only be a good thing for the Private Rented Sector as landlords throughout the sector will have to improve standards to attract the best tenants. We would encourage all buy to let landlords to maintain their properties to a high standard. Likewise, standards of management within the B2R sector should be consistently high so this should pull standards of property management across the whole Private Rented Sector upwards. It sounds like a win-win to me.