Claire Fallows and Pauline Roberts survey the current planning landscape for build‑to-rent schemes.
Residential accommodation designed and built specifically for rent – commonly referred to as “build to rent” (BTR) – is increasingly featuring in the property press. Interest from both institutional and private investors is leading to new BTR schemes throughout the country. The housing crisis has helped boost demand, but BTR has advantages beyond meeting need, not least in helping to establish critical mass and underpin new communities. And with the current softening of the housing market, the certainty of BTR both in terms of rental income and investment value makes the product inherently more attractive. However, is the planning system doing enough to support the BTR sector?
The government’s position
With housing high on the political agenda, BTR has government support. One of the biggest barriers to BTR schemes is viability and the ability to compete for land with providers of housing for sale. The National Planning Policy Framework (NPPF) and the accompanying guidance provide some assistance.
The NPPF defines BTR as purpose-built rental housing, usually offering tenancies of at least three years and typically professionally managed in single ownership and control.
The guidance notes the government’s desire to “simplify” treatment of BTR within the planning system. In assessing and planning for housing needs, local authorities must take into account the demand from those who wish to rent and reflect in their policies the circumstances and locations where BTR is encouraged.
However, if those promoting BTR schemes ask the planning authority to treat them differently from schemes for sale, then they can expect the authority to seek to secure the BTR tenure in a section 106 agreement when planning permission is granted. The NPPF and guidance recommend as follows:
- As residential developments, BTR schemes are subject to policies seeking affordable housing, which can adversely affect viability. Guidance sets 20% affordable provision as a suitable benchmark for BTR, although authorities can deviate from this if justified and developers can make a case for lower provision on viability grounds.
- Helpfully, the NPPF expects housing for rent to be the normal form of affordable provision, which need not be managed via a registered provider. This enables schemes to remain in single ownership and management by a BTR operator.
- The minimum discount on the affordable rented element should be 20%, including service charges. The percentage provision and/or the discount may be varied to suit local circumstances or a commuted sum secured. Those matters will be covered in the section 106 agreement, which may also secure any key parameters of the letting agreement, agreements on management and marketing and an annual statement. A planning condition is recommended to secure tenancies of a minimum of three years.
- Eligibility for occupation of the affordable element should be determined with regard to local household income and rent levels. Authorities may retain the right to suggest suitable tenants, but should not have nomination rights.
- Operators need flexibility to respond to changing market conditions, and onerous exit clauses may impede development. The section 106 agreement can include a covenant to retain the private units in rental tenure for a minimum period. If the units are sold out of BTR tenure during that period, a clawback mechanism is recommended, to recoup to the authority the affordable housing contribution it would have been entitled to, had it granted permission for a scheme for sale in the first instance, and for the loss of any affordable provision.
National policy and guidance must be taken into account in determining planning applications. However, there is ample scope for authorities to find reasons based on local circumstances to deviate from it.
The London approach
London originally led the way in BTR delivery. The current London Plan (2016) acknowledges the advantages of larger-scale investment in the covenanted private rented sector and requires boroughs to support the sector in addressing housing needs and to take account of its distinct economics.
The new emerging London Plan, currently under examination, includes a specific provision (Policy H13) on BTR, which supports the role it can play in accelerated delivery. The criteria for qualification include a minimum of 50 units, held under covenant for at least 15 years (expected to increase in the future as the market matures) and with a clawback if the covenant is broken. Tenancies must be a minimum of three years with rent certainty and transparency on rent increases. There must be on-site management and a complaints procedure/ombudsman scheme.
Fast track
Draft Policy H13 followed the NPPF in proposing that the affordable housing could be discounted market rent, but should be “genuinely affordable”, preferably at London Living Rent levels (low enough to enable tenants to save for a deposit). Schemes delivering 35% affordable with at least 30% London Living Rent could follow the “fast track route”. Otherwise, schemes would be subject to viability testing and potentially a review of the ability to contribute more to affordable housing during build-out and letting (late review). Boroughs were reminded that they could allocate sites for BTR or require a proportion of BTR tenure on larger sites.
The draft policy received mixed responses. Some boroughs were supportive; others expressed concern about the impact on overall affordable provision, as BTR in general is less able to subsidise affordable housing than schemes for sale. Some boroughs sought the right to set their own affordable housing requirements. The mayor subsequently proposed changes to draft Policy H13 to allow boroughs, through their development plans, to require low-cost rent managed by a registered provider in BTR schemes. This will impact viability further and has caused concern in the industry.
BTR operators and developers are also concerned about the 35% target being unrealistic – and about the evidence on which it is based. Questions have been raised about the appropriate viability model for the sector. It remains to be seen what form Policy H13 will take in the final London Plan.
BTR delivery
Growth in the BTR sector beyond London has been significant in recent years, with planning permissions being granted for BTR developments in a number of major urban areas – and particularly university cities such as Brighton, Oxford, Reading, Cambridge, Birmingham and Bristol.
Further, there has been increasing interest from institutional buyers in forward-funding BTR blocks within larger sites. Here, the planning permission might not require the delivery of BTR, but the forward-funding of a block can assist with the residential developer’s cash flow and aid with placemaking aspirations.
Given the contraction of retail space in our city and town centres and the huge interest in retail repurposing, BTR may also be a valuable element in revitalising centres in the future.
Lessons and experiences
The BTR product is not always well understood by planning officers in terms of its merits or unique economics, which can slow progress and complicate negotiations. In general, urban areas and university cities tend to be more experienced and familiar with BTR than others. Outside London, this situation is not surprising for a relatively new product, which is not yet reflected in many local plans. Members on planning committees may be unfamiliar with the differences between the build-for-sale and BTR models, which increases risk of a refusal.
Early discussions
For applicants, early engagement with planning officers is therefore essential to understand their level of knowledge of (and support for) BTR. Early discussions are required on the mechanisms for covenants, clawback and review. Too often, these matters are left until after the resolution to grant is secured or are not well considered in the report to committee, causing delays in the finalising of the section 106 agreement and ultimately housing delivery. There is more that the industry might do to educate both planning officers and council members on BTR, which could include bespoke training sessions.
The delivery of BTR accommodation is deeply influenced in London and many other areas by the approach towards affordable housing. Some London boroughs prioritise social rented affordable housing (subsidised by build-for-sale schemes) above BTR delivery. Depending on the outcome of the London Plan examination, a firmer approach at examination into borough plans may be required to establish the need for rental accommodation and how that need will be met. While the spread of BTR schemes across the country is encouraging, the government must consider whether its guidance is providing adequate support and certainty for the BTR sector.
Claire Fallows is head of planning at Charles Russell Speechlys LLP and Pauline Roberts is planning director at Lichfields
