If hot air built homes, there’d be no housing crisis in Britain. And apart from the Battersea Power Station house of cards, there’s been no puffier sector of the market than the private rented sector, or build to rent as it prefers to be known.
Over the last three years everyone and their dog has been “setting up a build to rent fund” – a mesh of cash to build large-scale clusters of flats for rent. Everyone from Mill Group (whose ill-fated venture folded last year) to behemoths like LaSalle have been snapping up blocks, some of questionable quality, in the hunt to splash the cash.
Many have yet to build anything at all, in spite of rather bold claims involving heaps of zeros.
That’s why today’s announcement by Legal & General of a £600m tie-up with Dutch pension fund PGGM is welcome: Not only is L&G the most punter-friendly name to have entered the market thus far; they are actually building stuff using their own balance sheet.
As its Ferry Lane consultation web page shows, L&G’s first scheme a few Tube stops up from where I live in north east London, will bring a fantastic amount of value to a part of London which hasn’t evolved in decades – despite being 20 minutes from the West End.
The other relevant newsworthy element of this is that it coincides with the London Land Commission unveiling public sites up for disposal which I’ll come on to in a minute. There’s a really cool map you can view here.
The only firms with a large-scale portfolio of residential property actually designed for rent (rather than bought off of house builders) are Essential Living (who we’ve worked with since they were set up three years ago) and Westrock.
Essential Living is backed by M3 Capital Partners, a London-based fund manager who made its name helping establish Britain’s student housing sector with Unite a decade ago. It has eight schemes on the go with the first two (Vantage Point, Archway and Berkshire House, Maidenhead) set to open this year.
Vantage Point, which will be the first to open, is an office-to-residential conversion (OTRCs), and will see the much-hated Archway Tower wholly reconfigured to offer 118 high-quality flats alongside communal areas and amenity spaces.
Westrock, a London-based developer, also has a pipeline of OTRCs but is focused outside of London in popular employment hubs like Bracknell or Bedford – places which are much cheaper than London but which still have a pent up demand for quality housing. The firm is also designing properties specifically for renters.
The likes of M&G and Invesco have been forward-funding schemes, with developers like HUB, who specialise in mid-market housing, creating housing which is then snapped up without the fund taking planning or construction risk. Recently, HUB announced a forward-funding deal around its Old Vinyl Factory rental scheme in Hayes to Fizzy Living. Previously, it linked up with M&G to forward fund the company’s first build to rent project in Acton.
One of the findings of our major report Funding Britain’s Rental Revolution which Blackstock Consulting wrote for Addleshaw Goddard and the BPF last summer, was that the majority of funds were taking a much more risk-averse route to development. The report, covered widely including on BBC Breakfast, signaled a £30bn pot of cash was waiting to invest.
Since then, these estimates have been revised upwards and Knight Frank now thinks there’s £50bn waiting. But to a large extent, this is all irrelevant if investors don’t have consented sites with spades and skilled workers ready to get stuck in. This is why the announcement around the London Land Commission, suggesting there’s scope to deliver 130,000 homes is timely.
About a quarter of land in London is owned by the public sector, rising to 40 per cent in some boroughs.
Research by Daniel Watney LLP, an independent property consultancy, analysed Government data to suggest over one million homes could be built across England on brownfield land, which makes up much of what’s publicly owned. Their report, reported by City AM and others, suggested at least 157,000 homes could be built across the capital.
Why this all matters is because the State is sitting on a mass of value. There’s a need for housing but, contrary to what any politicians will suggest, building loads of homes for sale won’t necessary help. A mass of construction won’t lower prices – as additional infrastructure and investment makes downtrodden places more desirable. And if you don’t believe me, research bods at LSE have a research paper on this very topic here.
The opportunity then for the public sector is to generate real long-term value from the mass of land it has. Sadly, the public sector’s interpretation of “best value” to quote civil service jargon is flogging stuff off to the highest bidder. It’s something we’ve seen recently with the Transport for London (TfL) development framework which is full of the usual suspects: big companies high on weighty balance sheets but often not nimble enough to create the creative community-led regeneration places often want.
Clearly bodies like TfL have huge funding gaps they now need to fill. And creating blocks of flats to sell off – as they plan to do with their current HQ above St James’s Park Tube – will fill in some of this black hole. Yet a far more sensible approach for many such organisations would be to retain ownership and look at generating income – rather than a quick capital receipt.
Which brings us back to build to rent.
It’s no surprise that several of Essential Living’s first schemes are all above or very near to Tube stations. Vantage Point Archway Tower is above the Tube at the end of Holloway Road, as is the firm’s Swiss Cottage proposal. L&G’s Ferry Lane project is a stone’s throw from Blackhorse Road Tube just as HUB’s Old Vinyl Factory development is close to the new Crossrail station at Hayes.
For companies selling the convenience of renting from a professional set up – rather than a random buy-to-let investor – the premium of great transport links is obvious. And I’m told TfL is very keen to look at build to rent going forward.
Other public sector sites should also do all they can to bring forward large portions of developments for rent which, by definition, will be far more affordable (in a real terms sense) that anything built for sale, even at average prices. The main benefits would be creating long-term income for hard-pressed local authorities that could fund social care, education or fixing potholes.
Moreover, thinking about how to genuinely create inviting places is essential. Developers who rarely understand the meaning routinely shovel around horrible phrases like “placemaking”. But thinking about medical facilities for example, which can very much create inviting cash flows for investors and other social infrastructure (education, social care) is often left until later in the day.
Our traditional approach to disposing of public land is selling it off for posh homes – the dearer the better. But as industrial developer Segro recently said in a report commissioned by the British Property Federaton we need a wider conversation about what gets built where. While not sexy, industrial property – or sheds – underpins the lifestyles of London’s Ocado generation. And as a report we helped write with Colliers International, called From Sheds to Shelves, showed, there’s huge pent up demand for industrial real estate.
The FT’s story on the report noted how the rise of e-commerce was changing demands for space.
What this means is that the vast swathes of pubic land could be generating income from all kinds of areas for many different uses. And if people are serious about having their box sets or organic sausages delivered fresh the next day, then having a micro Amazon shed nestled above the local walk-in clinic wedged between clusters of professionally rented housing blocks may not be such hot air at all.
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