When I arrived in the UK from the US 10 years ago, someone summed up to me the traditional importance of home ownership by saying: “Until you buy your own home, you are short of a property.”
The importance of ownership, whether it is a home or a car, is ingrained into the British culture. But it is ceding ground, slowly but surely, as new generations are adopting a different hassle-free lifestyle. Today they Uber to the restaurant, or Zip to the Cotswolds for the weekend.
British home ownership peaked in 2002 at 70%, and has dropped to 63%. The private rented market has increased from 10% to 17% during the same period.
The affordability challenge has definitely played a key role in this shift. But we should recognise another fundamental change: the population is a lot more mobile and international than it used to be.
In the late 1980s, only 8% of the population was moving house in any one year. Today, this is above 12%. It is no surprise that the majority of those are young, a mix of students and professionals.
This requires housing flexibility, and the Uber generation has high expectations as to the quality of the rental product and service they want. The traditional buy-to-let model definitely does not do this, for reasons familiar to us all.
Add to that the fact that 240,000 new homes need to be built every year, but fewer than 150,000 are being delivered today, and we are definitely not on the right path to deliver what the new generation needs and wants.
There might be a solution: build-to-rent at scale. I was a very happy tenant during my stint in the US, which developed a successful, professionally managed build-to-rent market decades ago.
The Investment Property Forum (IPF) this week publishes a paper summarising how the build-to-rent model could accelerate delivery of housing at scale. Take the simplified example of a 1,000-unit project: it would take 10 years to deliver it through the traditional house builder’s model, assuming an average of two sales per week. Apply build-to-rent and you could deliver it within four years, with a conservative assumption of seven lettings per week. How is that for place-making large regeneration sites?
Build-to-rent has its own challenges, but these can be overcome. There is a viability challenge, but there is money. Indeed, long-term investors can now see the benefit of developing, owning and managing residential properties over the long-term, and they do not need the traditional build-to-sell return of 17.5%-20%. In order to take development risk, they typically need a minimum of 10% IRR, though this is difficult to achieve with existing planning obligations.
The house builder model definitely has a role to play in the UK. People will continue to be willing to buy their home at some point in their life, but probably later, when they are professionally and personally more settled.
The traditional build-to-sell model delivers private housing for people who want to and can buy, and affordable housing for key workers and people in need, but what about the households in between?
Developers, government and local authorities need to work together to unlock this issue. The IPF paper shows it has been done in some innovative and flexible boroughs. Let’s do it at scale to help alleviate the housing crisis in the UK. Otherwise, our Uber generation will quickly realise they can find exciting jobs and professionally managed quality housing overseas.
Jean-Marc Vandevivere is head of residential at British Land
