Bill Hughes

Bill Hughes

Head of Real Assets

Real Assets

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Government has opportunity to accelerate growth in the build to rent sector, unlocking the supply of over 1m homes

In a new collection of essays published by The Lyons Housing Commission and IPPR, Bill Hughes, Head of LGIM Real Assets, discusses how the Government could help remove barriers to institutional investment into the Build to Rent (BTR) sector, unlocking the supply of over 1m new UK homes.

A building site

The full 'Fixing our Broken Housing' Market report can be found here

The government must go beyond the commitments made in the housing white paper if it is to meet the challenge of building the millions of new homes that are needed in the UK.

The importance of greater diversity in housing supply was a strong message in the government’s housing white paper, moving the focus away from solely home ownership. In recent years, successive governments have recognised the value of institutional investment into the BTR sector. There is also capital waiting to invest.

Long-term institutional investment into BTR allows for homes to be built at scale which can deliver reduced living costs and more choice for its residents, whilst building sustainable and vibrant communities. This means that by supporting the entrance of institutional investors with a long-term view, we can create a more sophisticated rental sector that champions the rights of residents.

Man smiling
This long-term vision will enable the offering of family-friendly leases of up to five years and will allow for high-quality, well-managed accommodation in the urban locations that residents want to live. A long term view also can help create diverse communities. If residents have taken a five year lease they are likely to want to invest into the community in which they live. We strongly believe that for a scheme to be noteworthy it should be integrated into the wider community and contribute to the wider improvement and regeneration of the local area.

Despite plenty of capital, political desire and a well-defined business model, BTR remains a new sector which is still struggling to operate within planning and taxation regimes that were designed not to facilitate investment, but to control the short-term ambitions of Build to Sell (BTS) developers. There is work to do to improve conditions to support the sector’s expansion. We need the governments support with this.

We believe that there are three key factors that are creating barriers for the BTR sector that the government should consider:

Untangling the VAT system

Where development sites are exempt from VAT, BTR cannot compete with BTS. This is because the VAT cannot be recovered by investors whose business models are based on long-term investment rather than short-term development profit. A fairer VAT system must be introduced that puts BTR developers and investors on an equal footing with BTS housebuilders. There also remains an additional 3 per cent stamp duty surcharge on second homes, which also captures large-scale residential property owners. This makes some schemes unviable, as end value is below development cost.

Creating a better planning environment

Currently many local authorities have no policy in place for BTR as it has only recently come to the fore. This lack of consideration or understanding of the difference of the BTR model is greatly increasing the time taken to secure planning permission compared with other types of development. We need to build new homes and this process is only slowing up the process. The BTR business model is significantly impacted by any delays in construction and completion.

Encouraging capital investment

We believe that the government should encourage long-term liability driven investors to look to the residential sector as a way of meeting their needs. To help this we urge a review of how Solvency II treats long-term income focused investments into the residential sector.

The BTR sector is a vital component of helping the governments housing strategy, and aims to complement not compete with more traditional forms of housebuilding. It brings a new business model offering genuine new supply. A new business model requires a fresh approach.

With the help of the government we have a genuine opportunity to grow the BTR sector. This will not only materially reduce the gap between annual housing demand and under-supply, but will also lead to the regeneration of urban areas, creating homes and communities were residents will want to live.