By Chris Darling
Progress has not been without difficulties. Whilst there seem to be plenty of funds excited about balancing their property portfolios with rental apartments, sites are often difficult to acquire and purchasers need to compete with market residential developers.
Construction costs also remain stubbornly high, and with many materials imported from Europe, the exchange rate devaluation is expected to result in further materials and specialist supplier inflation.
Also, by and large, planning officers haven’t bought the line that BTR is effectively a form of low cost housing, so Section 106 affordable provision has to be factored in.
In the capital, The Mayor’s “A City for all Londoners” consultation document has rightly spotlighted the important role that BTR serves in providing housing, with a commitment to attracting finance into new high quality development.
However, some also fear the likelihood of the Mayor setting rents in line with the London Living Rent scheme, which could make BTR unattractive to investors and hamstring this fledging sector before it has even got into a stride.
There will certainly be challenges ahead.
Not least is the fact that the UK rental market is still relatively unproven- the amount of salary that people will pay to rent a relatively luxurious smart new flat is still generally unknown.
When you do the maths, the profitability of current BTR schemes ends up pretty close to the wire.
Anecdotal discussion suggests that many schemes are actually stalled. Other developers are biding their time waiting to see how well their competitors are actually doing now the first schemes are complete and marketing for tenants.
Brexit has given this some impetus, as those nervous about the country’s economic prospects may choose to rent rather than tie up their savings with a purchase.
There are also things we can do to increase the stock of flats on the rental market.
The product, for example, should be considered. The strategy of many promoters is to look to larger luxury units, using their overall quality, size and comparative affordability to tempt people away from home ownership.
However, I would argue that the core BTR market will be young professionals transitioning from student housing, but not yet looking to – or unable to – purchase.
In terms of their priorities, I would argue that unit sizes should be carefully considered. Though careful design, it is possible to achieve fully functioning 1 and 2 bedroom flats for 10-15% less area than normal space standards. This reduction roughly correlates with build cost saving, and therefore assists considerably to achieve a healthy project appraisal.
Young people do not seek large family kitchens, they often prefer walk in showers to baths, require reduced storage space and typically they don’t own cars (at least in London).
Many BTR schemes also incorporate generous amenity provisions, and while these are important the cost benefit should be weighed. While they are attractive features- swimming pools are expensive to manage, and in practice underused, while often nearby gyms will suffice. Surely, tenant priorities are more likely to be focused on affordable rent, decent Wi-Fi and bike storage, above saunas and spas?
On the other hand, as ground floor space is usually unsuitable for residential, it can be utilized as meeting lounges, screening rooms and shared kitchens at minimal cost, while roof tops command great views and provide outdoor gardens and amenity.
At least for the young professional market considering pared back unit sizes, sensible amenity provision and carefully designed efficiently constructed buildings may well get more schemes off the starting blocks.
As for the effect of Brexit, and its associated restrictions on immigration and a cut down on labour mobility, will it affect a core part of the BTR market? Those young graduates moving around Europe’s cities to progress their careers, may not be around much longer or at least in such numbers.
Also, the wider BTR market, perhaps including families and down sizers, may take longer to establish itself, but people may eventually shift away from their deep rooted instinct to save up, borrow and buy their own place.
And yet still the prospect in London of imposed low rental levels is potentially making BTR unattractive.
What next? Watch this space.
See original article from Costar Magazine: http://www.costar.co.uk/en/assets/news/2016/November/CoStar-Column-PRS-is-still-trying-to-find-its-place/