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PRS: Dedicated use class or covenant to rent?

Discussion within the build-to-rent sector has focused on two possible planning solutions to help reduce obligations: a new use class, or covenants to rent. What are the implications?

The private rented sector recently eclipsed social housing as the second most prevalent form of housing tenure in England.

In particular, large-scale purpose-built rental blocks or ‘build-to-rent’ developments (based on the US ‘multi-family’ model) are increasingly touted as one potential solution to the current housing crisis. Offering both flexibility and a sense of community, these developments are likely to prove attractive to the younger generation, who increasingly find themselves priced out of the housing market.

However, financial viability has long proved a concern for both developers and investors; build-to-rent schemes generate a much lower rate of return than the traditional build-to-sell model, with tight profit margins based on income rather than capital release. For this reason, unpredictable costs such as planning obligations can prove one risk too far.

Planning solutions

Some local planning authorities seem to be beginning to recognise the benefits of long-term build-to-rent schemes.

These developments can assist regeneration and place-making while also delivering substantial numbers of homes quickly and stimulating employment. Yet if local authorities are to be persuaded to reduce planning obligations for rental schemes, they will be understandably concerned to ensure the proposed rental use is maintained.

Discussion within the build-to-rent industry has focused on two possible planning solutions; the creation of a new use class and the use of planning ‘covenants to rent’.

The term ‘rental covenant’ in this context refers to a restrictive covenant imposed by the local authority, as a condition of granting planning permission, requiring the units to be used only for short-term rentals (and therefore prohibiting sale of the individual units) within a defined period.

“A new use class would leave local authorities free to tailor planning conditions to the proposed rental scheme, in the knowledge that none of the units can be sold without a further planning permission”

Proponents of a new build-to-rent use class cite student accommodation as an example of how long-term planning constraints can attract activity and investment into an area while at the same time providing local authorities with sufficient comfort for the future.

A new use class would certainly demonstrate that the government is serious about encouraging build to rent, in the wake of its ongoing homeownership initiatives. Furthermore, it would leave local authorities free to tailor planning conditions to the proposed rental scheme, in the knowledge that none of the units can be sold without a further planning permission – with a further set of conditions.

A step too far?

Yet in a nascent market like build-to-rent, many believe that a new use class would be a step too far.

There is no apparent shortage of developers and investors keen to test the build-to-rent market, but the concept largely remains an unknown quantity in England. Flexibility therefore remains important to the overall risk profile.

Set against this background, rental covenants hold many advantages.

“There is no apparent shortage of developers and investors keen to test the build-to-rent market, but the concept largely remains an unknown quantity in England”

Firstly, they are available for use now by local authorities and require no new legislation. Indeed, a number of build-to-rent schemes in London and elsewhere have already been consented on the basis of a rental covenant.

In addition, details of the covenant can be varied between individual sites while still maintaining certainty for the local authority; factors such as the length of the required rental commitment and the proportion of market rent versus affordable / discounted rents will differ depending on the location and the community involved.

Being flexible

In the event that a developer wants even greater flexibility, a local authority may agree to financial clawbacks, allowing some or all of the units to be sold off prior to the end of the covenant on payment of a calculable, index-linked sum per unit sold.

For investors, a rental covenant provides a get-out clause; if the rental market has a downturn, or becomes less attractive following a legislative change, they will still have the ability to sell at the end of the covenant without the uncertainty of a further planning application.

As examples of successful build-to-rent schemes increase, we can only hope that more developers, investors and local authorities will be prepared to take the plunge and work together to achieve the perfect planning solution.

If local authorities are prepared to listen to developers’ concerns and use their existing tools flexibly, there should be no need for further changes in the law.

Olivia Tassell is a partner in the property team at Boodle Hatfield

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