21 July 2023

BPF debate: “Should BTR be allocated its own Use Class?”

On 12 July 2023, Commercial Real Estate Partner and Head of Forsters’ Build to Rent group, Helen Streeton, attended the BPF Build To Rent Committee Debate at CBRE’s Henrietta House.

The discussion focused on the question: “Should BTR be allocated its own Use Class?” Below are Helen’s key takeaways:

A key issue faced by BtR developers’ centres on viability, of which quantum of affordable housing to be provided is a major factor. There are cogent arguments for a lower delivery percentage in the BtR sector, when combined with other tenures which provide a discount to market product.

Traditionally, councils built housing and were funded partly by Government subsidy. For example, in the 1950s and 1960s, the increased development of high-rise blocks was linked to higher subsidy for those types of developments, which seemed the ideal solution to the housing problem in the post-war period. Right to Buy was introduced under The Housing Act 1980 and local authorities were then forced to sell stock. Nationally, over one million houses were sold within a 10-year period and many of these have not been replaced with new stock.

The idea of a Use Class separate from the general C3 Use Class was mooted some years ago in the NPPF. Following the Montagu Report in 2012, the BtR Sector has grown at pace both in terms of urban and suburban locations, however there remains a chronic shortfall in rental housing and the number of starts has slowed. In the planning system, we are only now getting a uniform approach to viability assessments in London and some other major cities, but not really elsewhere in the country. That leaves a lot of variation in the viability assessments submitted in support of application.

In addition, a lot of local authorities don’t have the skillset to properly review assessments, which can sometimes lead to a less than optimum level of affordable housing. Politicians at the local, regional, and national level tend to focus on the quantum of affordable housing provided and not how affordable the product is. Social rented housing “costs” the developer more than intermediate housing, so the developer will provide less in overall unit numbers.

Splitting the C3 Use Class in return for a lower percentage, or quantum, of affordable housing sounds attractive. However, it would likely result in perpetuity BtR units, which makes investors nervous regarding exit strategy. The current model can provide flexibility in terms of being able to provide for an either/or scheme through section 106 obligations, applying a different viability regime for BTR schemes. A reduced quantum of affordable housing for BtR schemes is workable, but only if accompanied by clawback provisions, which means if one then decides to sell on the open market within the stated period, one needs to pay back additional sums for affordable housing.

Beyond the planning system itself, from a market perspective, rental demand continues to outstrip supply. Demand continues to rise due to difficulties faced by, in particularly the younger generation, accessing mortgage products to buy homes.

The supply pipeline, although remaining strong, has been hampered by a combination of Covid-19 issues, higher cost of money and higher construction costs driven by inflationary pressure, and political uncertainty in the economy following Brexit. New legislation – the Building Safety Act (in particular, the London requirement for second staircases in tall buildings), the Infrastructure Levy, alongside potential rent control legislation and the Renters Reform Bill (which axes the Section 21 Notice Procedure), all impact on the decisions of developers and investors alike, to stay in the BtR sector.

The supply side issues outlined above can really only be addressed through lowering overall cost of delivery. This could be done by a lower affordable housing requirement, but there are other ways of incentivising on the supply side. If the government is serious about housing delivery it will look to address this and ease the burden on developers and investors grappling with the current planning regime, as well as the other changes outlined above.

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