The tale of the Build-to-Rent sector and the Renters Reform Bill

The Build-to-Rent sector ("BTR") has continued gathering momentum over the last year and looks set to continue that way. However, the Government's proposed reform of the private rented sector has caused much huffing and puffing in the real estate sector, much like the story of the Three Little Pigs and the Big Bad Wolf. Will the hotly anticipated Renters Reform Bill leave BTR developers with a house built of straw, sticks or brick?

BTR growth

In the UK alone, nearly £3.2 billion was committed to BTR in the first three quarters of 2022. Market players have reported a "wait and see" approach to new BTR deals, amid pressures from inflation, interest rates, and construction costs. However, the BTR market may be well-placed to weather the current storm as the market stabilises and as further BTR opportunities are explored, assuming the demand for rented accommodation continues its long, upward trajectory.

One emerging trend is toward suburban developments that provide single family homes. As interest rates rise and inflation fuels the cost-of-living crisis, many homeowners' mortgages are becoming unaffordable. More families may turn towards renting as a result.

We are also seeing the increasing potential of BTR in the senior living/retirement sector. This is highlighted by the recent Mayhew Review which found that 50,000 new retirement residential units need to be built per year to keep up with demand (as opposed to the actual figure of 7,000 units).

Renters Reform

The draft Renters Reform Bill is anticipated by May 2023. We summarised the proposed reforms in our client briefing note after the Government released its White Paper in June 2022 (click here to receive a copy). In particular, the proposal to abolish "no-fault" evictions under section 21 of the Housing Act 1988, combined with the removal of fixed term tenancies, led to fears that future investment into the residential sector would be negatively impacted. In fact, planned disinvestment in the sector has already started to emerge, accelerated by the impact of the recent interest rate hikes: the National Residential Landlords Association said that the supply of rental property will worsen over the next 12 months with a third of landlords planning to cut the size of their portfolio in 2023, the highest level of planned disinvestment seen in more than six years!

The Big Bad Wolf?

Whilst there is no doubt that removing no-fault evictions will provide residential tenants with increased security in their properties (which boosts tenant wellbeing and a sense of belonging), landlords of residential properties often require control to be able to deal quickly with problematic tenants, changes in the market, changes in landlord's circumstances, etc. The proposed abolition removes that control. The compromise for landlords comes in the form of proposals to reform the grounds for possession under section 8. These proposals have already divided opinion although we wait to see the details in the draft Bill.

However, BTR may be less exposed to these issues by the nature of the tenants that they attract and the longevity of the investment. Rents tend to be higher in recently completed BTR developments than older housing stock in the private rented sector due to the benefits these developments offer: the opportunity to work, live and play under one high-quality roof with modern and sustainable features and a focus on community space. Landlord-led evictions tend to be less frequent.

The more concerning issues for BTR investors coming out of the White Paper are the removal of fixed term tenancies and contractual rent reviews. The BTR model relies on accurate rental forecasting, which becomes tricky if a tenant may terminate its tenancy at any time on two months' notice and contractual rental increases are abolished. Many BTR schemes use index-linked reviews at pre-determined intervals which provide predictability and stability for both parties. Without these reviews, landlords would be left with the section 13 procedure to apply to the Tribunal to set a market rent where a rental increase cannot be agreed with the tenant directly. The proposals intend to give tenants greater confidence to challenge unjustified increases. However, section 13 is not well suited to the management of large schemes. It is time-consuming and costly. There are also concerns over the ability of the Tribunal to cope with the sudden increase in cases expected from the proposals.

A house built of bricks

After consultation with stakeholders, the Levelling Up, Housing and Communities Committee ("LUHCC") recently published a committee report to Government on with recommendations to refine the proposed reforms ahead of the draft Bill. Of particular interest for BTR, they recommend that:

1. All tenants be unable to give two months’ notice to leave until they have been in a property for at least four months. This will give BTR investors the certainty of at least six months’ rent at the start of each tenancy.
2. Rent review clauses are not abolished, but they must stipulate by how much rents will increase. If tenants consider that their rent has risen above market level, they should be entitled to a break period during which they can challenge the increase before the Tribunal. This paves the way for BTR developers to continue with index-linked reviews.

Whilst we remain at an early stage in the reform of the private rented sector, the Government has made it clear that it considers it a priority that they are committed to progress. BTR developers and investors should seek comfort from these initial indications that the Renters Reform Bill may not be the Big Bad Wolf after all…

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