COMMENT: New evidence demonstrates that an institutional build-to-rent model could save tenants thousands over the long-term, contrary to recent questions over whether the rent set by BTR owners is really sustainable for the average UK tenant, writes Dan Batterton, BTR fund manager at LGIM Real Assets.
There has been speculation in the media over the affordability of the new BTR product coming to market, including EG research showing that the average BTR scheme is 6.9% more expensive than the local market.
However, much of the statistics and research that we have seen in the media is focused on headline rent and does not really consider the full offering that purpose-built rental stock can provide. We consider this focus on headline rent to be misleading and believe that overall living cost is more important in assessing affordability.
These questions over affordability suggest that the industry needs to look at renting differently and explain the BTR offering clearly. Our Salford BTR scheme is an interesting example. Occupiers tell us that a key driver behind their decision to live there is the overall reduction in living costs it offers.
Living costs
As an institutional investor, we can affect living costs through our buying power. We buy in bulk at a considerably discounted price and pass the savings on to our tenants. These commodities include furniture, insurance, car club, internet, TV, cleaning, and so on. Moreover, we have the opportunity to build more energy-efficient buildings, which reduce energy bills for tenants over the long term.
Using the data we have garnered from our Salford scheme, when you then add in things like service charges, gym membership, credit checks and agency fees (although these are likely to come under legislative attack) we have calculated a potential savings of £300 a month or an 18.9% difference when compared with average rents for the same area.
Furthermore, BTR offers other cost-effective benefits to tenants such as family-friendly leases that set out rental payments clearly over the long-term, providing security and flexibility. Our offering of a five-year lease is crucial to affordability. We want to offer our tenants certainty of long-term occupation and affordability while retaining the flexibility that renting offers.
Impressive results
We have pulled together some statistics of our BTR five-year leases versus the VOA’s private rental market statistics and the results are impressive. We used Brighton as an example for our data. During the five years of our lease, rents are adjusted annually by CPI +1%, with a cap of 5% pa, irrespective of the level of CPI.
However, according to the VOA’s private rental market statistics, within Brighton and Hove rents grew by an average of 6.5% every year in the five years to the end of 2017. A CPI-linked five-year lease would have saved the tenant more than £7,000 over five years, while still providing the flexibility of a two-month tenant-only break option.
The scrutiny over affordability has also shone a spotlight on BTR’s role in delivering more homes to the UK. We currently build 100,000 fewer homes than we need, so it goes without saying that BTR cannot fill this void alone. However, BTR offers genuine net additional supply to help close the gap. Keeping things simple, the 100,000-home shortfall could be met by BTR, retirement living and the public sector equally.
Clearly there are misconceptions in this sector, meaning that we, as BTR owners, need to better explain the real value of BTR living, as well as its important contribution towards speeding up housing supply, to the public, local authorities, politicians and the press. BTR can deliver genuine additional supply to the mass market, but the industry needs to move away from just looking at rents and communicate the bigger picture.
Read more about government claims that private-sector rental property will solve the housing crisis.
