Build to rent (BTR) is the name applied in the UK market to purpose built, institutionally owned and professionally managed residential property which is rented on the open market rather than sold.
As of Q2 2023 there are about 88,000 operational BTR homes in the UK, with almost double that either already on site or at least with planning granted. That said BTR still only comprises a very small proportion of the wider Private Rental Sector (PRS) in the UK – about 1.6%. The PRS is typically not purpose built and not institutionally owned. To borrow terminology from the US market it is "Mom and Pop".
The rental market in the US is much more mature and the terminology that is used is often heard in the UK too. Primarily that is Multifamily which is assets typically comprising flats housing multiple families and Single Family which is assets comprising multiple houses, each let to a single family.
None of this terminology has any great meaning to consumers in the UK who typically are only aware of it if they themselves already rent in the sector.
So there remains a great deal of education necessary to both consumers and other stakeholders (including local planning authorities) as to what BTR is and how it works.
Other sub-categories also exist, such as co-living and micro-living and others will develop.
Build to rent – so is it a tenancy or not?
The vast majority of tenancies created in the BTR sector are fixed term Assured Shorthold Tenancies (ASTs), but other legal structures can also apply.
A debate can be had as to whether in particular circumstances a licence may be created rather than an AST. That generally is only likely to be the case when the occupation is only due to be for a much shorter period – more akin to hotel accommodation which is not being used as the occupier's primary residence.
There are circumstances when the basic requirements applying to ASTs might not be met. In the BTR sector the most likely is whether or not the maximum rent of £100,000 per annum is exceeded and whilst possible, this will be rare. If it does apply then a Contractual Tenancy will be created on the negotiated terms.
Many BTR operators will use Company Lets under which flats are rented to companies who allow their employees to use the flats when in town for business or similar. As these tenancies are not directly with individuals they cannot be ASTs and will be contractual leases with the companies instead. One risk worth addressing is that a company tenant could inadvertently acquire security of tenure for a business tenancy. That can be avoided by following the usual statutory process to agree such security is not provided.
Other options exist to allow for the variety of the BTR sector. Examples include licence arrangements for Utility Flats which are flats made available, for instance, for visiting relatives to use for a weekend. Perhaps most common though is an AST designed for use for two bed dwelling sharers under which arrangement two ASTs are entered into for each of the two bedrooms in a two bed flat, with shared use of the other facilities (such as the kitchen and bathroom) - which ASTs are let to individuals who might not have known each other previously.
Contact: Samantha Hall
Build to rent – does the sector need section 21?
The most commonly used form of occupation arrangement in the BTR sector is an AST. ASTs are governed by a statutory regime which provides a degree of security of tenure for the tenant, but also a mechanism under Section 21 of the Housing Act 1988 (Section 21) which allows a landlord of an AST to seek to recover possession of a home without there being any fault on the part of the tenant.
This clearly runs counter to the concept of security of tenure, but for many years was thought to be essential in order to allow for investors to be willing to participate in residential letting.
There are proposals to remove Section 21. Should BTR operators be concerned? On a first look basis this would appear to be a grave concern, but the BTR sector is very different to traditional PRS.
Various distinctions apply to the BTR sector which mean the concern is not necessarily as great as one might imagine:
- BTR operators take a great deal of care over approving tenants before letting to them.The preference is to minimise the number of times that such resources are applied.
- BTR operators never need to "live" in their homes themselves.
- BTR operators when disposing of their assets would always do so on an occupied, operational basis with tenants in situ.There is unlikely to be a need to dispose with vacant possession.
- Minimising void periods is very important to maintaining a steady income from the asset, so it is more likely that BTR operators would want to raise rents of existing tenancies rather than obtain possession and relet at a higher rent.
- Grounds for possession based on fault still exist, particularly for non-payment of rent.
- Obtaining possession via Section 21 is a lengthy and expensive process that can currently take over a year through the courts due to post pandemic backlogs.
So, overall the removal of Section 21 is of lesser concern to BTR operators than any proposal to impose rent controls.
The Renters (Reform) Bill was included in the November 2023 King's Speech and if it progresses in current form would end section 21 ‘no-fault’ evictions and assured shorthold tenancies in England.
Though note that the Bill will only come into force after reforms to the court system, the government says it would ensure landlords can smoothly and swiftly regain possession of their property.
In practice this is likely to be a significant delay – reforming the court system is no small task.
Contact: Yetunde Dania
Build to rent – how does it fit in with affordable housing?
BTR schemes do not necessarily fit easily with a traditional affordable housing model of a certain percentage of the new homes being sold to a registered provider (RP). Sometimes that will work, but often the requirements of investors to own freeholds, to be in full control of the ownership and management of the scheme will mean that approach is not welcome.
The definition of affordable housing within the National Planning Policy Framework recognises the difficulties of an RP being involved with a BTR scheme and allows for the affordable housing element of BTR schemes to be owned and managed by a person who is not an RP. Therefore, a BTR operator can own and manage both the market units and the affordable units.
Section 106 Agreements are typically used to control the terms on which both open market and affordable housing units within a BTR scheme shall be owned, managed, let, and (in the case of affordable units) the persons who are eligible to occupy such units. Typically S106 agreements provide for clawback payments to be made to the local planning authority if the scheme ceases to be a BTR scheme and reverts to a traditional C3 housing scheme within the "BTR Period" which is typically 15 years.
Many local planning authorities lack experience when it comes to BTR, and they may need to be guided on how S106 obligations should be drafted so that they work commercially.
Contact: Rory Stracey
Build to rent – what are the tax implications?
Renting residential property in the UK has a downside from a VAT perspective. That is the grant of residential tenancies at a rent such as ASTs is exempt from VAT, meaning that any VAT incurred in relation to that activity is irrecoverable. If that VAT is on the price paid originally for the land it could be a significant sum, large enough to impact on scheme viability
It should be possible to mitigate any VAT cost, but this will depend on the structure. For example, granting an operating lease with a term of more than 21 years to an operator (not within the same VAT group) of the property would usually be a zero-rated supply which should allow for VAT recovery.
This may not be possible in which case an alternative structure is to purchase the site at "golden brick" stage which should be a zero-rated purchase. This means that no VAT is incurred on acquisition.
Contact: Michael Surry
Build to rent – why is latent defects insurance essential?
The traditional build to sell market is set up in such a way as to provide latent defects insurance at a level that the UK mortgage market requires. In particular that is, at the level of cover for individual flats.
The latent defects market has responded to the needs of the BTR market by producing products that relate to the whole structure owned by the investor. If, for instance, it was necessary to move residents out, cover is available for removal and storage of possessions, provision of alternative accommodation and loss of rent.
In a similar way as the market has responded to the needs of registered providers, there is optional cover available for contractor insolvency prior to practical completion. This has become particularly important in the current economic climate, when more contractors are facing insolvency and can provide an additional layer of comfort to other contractual insolvency protection (such as a performance bond and/or parent company guarantee and/or increased retention).
Finally, as the secondary market for BTR schemes develops and we see more assets being traded then quality and flexible latent defects cover will be essential.
Contact: Victoria Ball