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Future Looking Bright for Build to Rent Market

Date: 25/09/2019 | Commercial Property, Corporate & Commercial, Planning, Residential Development, Infrastructure & Projects, Construction

There may be no place like it but what, exactly, makes a home? Developers and planners seek to answer this question in an increasingly sophisticated residential sector, one which continues to diversify to meet evolving occupier needs. As a result, sub-sets of housing beyond the traditional owner and landlord/tenant models are now emerging. This can be seen with the rise of student accommodation, retirement housing and short term lets, including those administered through Air BnB.

Build to rent (BTR) properties are another emerging proposition. Having taken off south of the border, BTR is now establishing a presence in Scotland with over 5,000 units consented or built to date. With approximately 15,000 private rented housing units built in Scotland 2018, the figures suggest BTR is here to stay as an asset class in its own right.  

In Planning Delivery Advice from September 2017, the Scottish Government acknowledges that BTR is a distinctive offering. It is usually large scale, with multiple dwellings in single, institutional ownership with self-contained units which are let separately. The whole development is professionally managed by a single company with residents often having access to communal amenities such as gyms, working spaces and recreation facilities. In short, BTR is purpose-built for modern co-living.

BTR can benefit residents and planning authorities alike. Its scale encourages place-making, the creation of communities by providing facilities along with living accommodation. In addition to social advantages, there can also be financial benefits. Councils can require developers to contribute towards improving wider local amenities, usually through S75 agreements. For large residential schemes, these typically include a focus on affordable housing provision, making BTR an ideal solution in helping reduce shortfalls within this market.   

It is, however, not a panacea. To encourage development, affordable housing thresholds in England have tended to be lower for BTR than traditional residential schemes. If emulated in Scotland, this approach means BTR might not make a dramatic impact on affordable housing delivery after all. The quality of affordable housing provided within BTR schemes also cannot be taken for granted. This has been demonstrated by the “poor door” phenomenon in London, where provision to affordable housing residents is lower quality and they are denied access to shared facilities enjoyed by other occupiers of market units within the same development. 

BTR raises regulatory issues too. As a new concept, it does not sit neatly within the existing planning regime. It is not in any planning use class nor does it enjoy permitted development rights so any change of use to or from BTR technically requires planning permission. Without this permission, there is a risk of enforcement. Local authorities in Scotland are already stretched and would likely struggle to detect or enforce such breaches. Given the Scottish Government’s support for BTR, could it mean councils will be discouraged from enforcing these in practice?

While such inconsistencies remain, we must be mindful of how the planning system’s response to novel challenges affects public confidence in the regulatory regime more broadly.  

Problems encountered with Air BnB-type properties could similarly affect BTR. High levels of turnover or “tenant churn” could lead to anti-social behaviour and pressure on services like bin collections and car parking. Unlike Air BnBs, however, BTR benefits from a more extensive regulatory framework, with other rules applying in parallel to planning and allowing for more holistic oversight. Landlord registration schemes and property agency standards assist in protecting tenant rights, along with Private Residential Tenancies.

Developers and investors also enjoy multiple-dwellings tax relief, tailored mortgage products and the Rental Income Guarantee Scheme (RIGS), run by the Scottish Futures Trust, which compensates certain investors who do not achieve anticipated rental incomes from BTR.

As the Planning (Scotland) Act 2019 comes into force and new policy develops (the draft National Planning Framework 4 setting out strategic planning objectives for Scotland is due in 2020), BTR is expected to be given more prominence. Pending formal change, councils are likely to continue regulating BTR through conditions to planning permissions and S75 Agreements but behaviours will still need to adjust.

For example, S75 agreements are frequently used to spread payment of financial contributions over time. In the short term, this could assist developers needing up-front investment. In the medium term, a longer payment schedule could put off investors - S75 agreements bind successive owners so future investors could be on the hook for outstanding payments.

The trick for developers will be to convince investors or asset buyers to focus on the long-term prospects of BTR. For now, indications are that those prospects are bright.

This article first appeared in The Scotsman on 23rd September 2019.

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.


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