The PRS context: PBSA and Build to Rent

Kath Scanlon

London Student Housing Conference

Woburn House Conference Centre

8 July 2016

A short history of the PRS

• PRS declined to 11% of total stock in England

by the mid-1980s

• Deregulation of rents in 1988 led to slow

increase in supply

• Owner-occupation for young people badly hit

in early 1990s

• Buy-to-Let mortgages introduced in late

1990s – PRS started to increase quite quickly

• Affordability crisis in early 2000s added to

pressure on PRS

The financial crisis and its aftermath

• Credit and housing markets dried up

• Sellers could not sell; purchasers could not

buy – so PRS grew rapidly

• New construction fell by more than half; while

• Immigration and natural growth increased the

population of London very rapidly

• Crisis of supply with all net growth

concentrated in PRS and among individual

amateur/part-time landlords

• Policy makers looked for more housing

overall and new build in PRS in particular

The PRS today

Landlords

• Most landlords private

individuals

• Data on landlords

poor—though clearly

many see investment

as contributing to

pension provision

• UK taxes landlords less

favourably than many

other countries

The sector and tenants

• Highest % in cities

• Tenants more likely to

be young, working

and/or migrants

• Increasing numbers of

families and longer-

term tenants

• About ¼ receive

housing benefit

Housing tenure in London

1991-2014

10

15

20

25

30

35

40

45

50

55

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Owner occupation Social renting Private renting

Policy directions• Reduce role of small ‘amateur’ investors

– Increase in Stamp Duty Land Tax

– Change in tax treatment of mortgage interest

– No reduction in capital gains tax

• Increase % of large corporate landlords—seen as– Providing better accommodation &

management

– Financially more stable

– Offering longer leases

• Build to Rent fund

Student housing as a model

• Business Expansion Scheme:

universities provided land and took

risks; investors bought units and got

indexed rent stream backed by

university assets

• Provided guaranteed long-term income growth for institutions

• Now a successful unsubsidised

market -- model for Build to Rent

Build to Rent: the new thing

• Follows American ‘multi-family’ model:

purpose-built rental accommodation

• Usually mid- to high-rise blocks in

locations with good accessibility

• Layouts differ somewhat from

standard for-sale schemes

• Entire blocks owned & managed by

single organisation

Features

• Professional management (often full-

time handyman/concierge on site)

• Amenities (gym, cleaning service)

• Longer leases

• Often fully furnished

An example:

Aberfeldy Village, E14

Viability

Key issue for purpose-built student

housing and Build to Rent--why?

Land pricing as residual

Land price = gross development value –

build cost – required profit

S106

• As a condition of planning

permission, local authorities can

require developers to contribute to

• Local infrastructure (schools, roads)

• Affordable housing (as part of the

development, on another site, or a

money payment). Typical target: 30-

40%

Notional for-sale scheme

How it works for PRS/student accom

• Assumption: that land is not earmarked for

PRS or student use and can be sold to

highest bidder

• Student accom/PRS GDV based on

capitalised value of rental stream is

generally lower than for-sale GDV

• Like-for-like, PRS / student developers can

therefore pay less for land than for-sale

developers, and

• Have less headroom for affordable housing

or other developer contributions

Notional PRS vs for sale (no S106)

Notional PRS vs for-sale (with S106)

BtR affordable requirements in practice

• BtR is often one element of much larger

development (e.g. 400 units out of total

3000). In such cases the affordable

component may be elsewhere in the

scheme

• BtR-only schemes are normally required to

provide some affordable housing.

Corporate landlords usually prefer to own

and manage this themselves rather than

selling or leasing to an RP—but not all

local authorities happy with this.

The viability rules

• National planning policy allows

local authorities to require

developers to make a contribution

to affordable housing in their area

• However, if developer can prove

that building affordable homes

makes a residential scheme

financially unviable, the local

authority’s target can be

reduced/waived

The viability assessment

• Basically a spreadsheet that works back

from known/assumed information to

calculate unknown information

Eventual sales costs of new units -

construction costs (including land) –

developer required profit

= amount available for affordable housing or

other planning obligations

Thrust and parry

• Developers and local authorities make

competing viability calculations (those of

developers protected by commercial

confidentiality--Greenwich case a first)

• Negotiations take place

• Who wins? Depends on

– Parties’ relative negotiating strength

– The objective merits of the case (maybe)

– Who can afford the best advisers

Consequences for development

• Lack of certainty about what is required

affects price of land

• Developer’s required return should

increase (risk premium) and price of land

should fall

• Existing landowners may hold their land off

the market, anticipating a higher price later

• Negotiation process itself can take months

(years)—which delays final delivery

• Ultimate effect: To reduce overall

production of new homes?

Evidence from LSE research

• In London, strong competition means

developers often pay more than the residual

value for land

• And therefore must ‘break planning’ (negotiate

a bigger/denser development than the plan

should allow; reduce the % of affordable

housing) in order not to make a loss

• Potential international investors are put off from

investing at development stage by the

uncertainties of the planning process, which

are unfamiliar in many countries—they buy

only on completion

Implications for new PBSA

• Build to Rent investors have an inbuilt

escape strategy (sell units off to individual

investors or owner-occupiers) that student

housing lacks

• Affordable-housing requirement responds

to obvious need BUT requires change to

established financial models

• Viability issues will come to the fore—and

the concomitant long negotiations, battle of

viability experts etc

• Possible ↓ in new provision, esp in high-

cost areas.

What could be done?

• Allow PBSA providers to rent e.g. to

tourists outside term time

(> yield → > GDV)

• Designate particular sites for PBSA only

(eliminate competition from mainstream

developers)

Looking ahead

• Biggest ? now: effect of Brexit

• Recent upheaval in commercial property sector

(3 major firms have suspended withdrawals

from funds)

• Many major investors in PBSA and Build to

Rent are foreign (recent PBSA deals include

Canada Pension Plan Investment Board,

Greystar). Will they see Brexit as a buying

opportunity or an evacuation alarm?

• Many PBSA tenants are foreign students. Will

demand from this segment remain strong?