Build to rent
Guidance on build to rent.
Planning for build to rent
Should authorities promote build to rent?
Build to rent is a distinct asset class within the private rented sector, and has been defined in the National Planning Policy Framework glossary, in order to simplify its treatment within the planning system.
As part of their plan making process, local planning authorities should use a local housing need assessment to take into account the need for a range of housing types and tenures in their area including provisions for those who wish to rent. Specific demographic data is available on open data communities which can be used to inform this process. The assessment will enable an evidence-based planning judgement to be made about the need for build to rent homes in the area, and how it can meet the housing needs of different demographic and social groups.
If a need is identified, authorities should include a plan policy setting out their approach to promoting and accommodating build to rent. This should recognise the circumstances and locations where build to rent developments will be encouraged – for example as part of large sites and/or a town-centre regeneration area.
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Affordable housing
What provision of affordable housing is a build to rent development expected to provide?
The National Planning Policy Framework states that affordable housing on build to rent schemes should be provided by default in the form of affordable private rent, a class of affordable housing specifically designed for build to rent. Affordable private rent and private market rent units within a development should be managed collectively by a single build to rent landlord.
20% is generally a suitable benchmark for the level of affordable private rent homes to be provided (and maintained in perpetuity) in any build to rent scheme. If local authorities wish to set a different proportion they should justify this using the evidence emerging from their local housing need assessment, and set the policy out in their local plan. Similarly, the guidance on viability permits developers, in exception, the opportunity to make a case seeking to differ from this benchmark.
National affordable housing policy also requires a minimum rent discount of 20% for affordable private rent homes relative to local market rents. The discount should be calculated when a discounted home is rented out, or when the tenancy is renewed. The rent on the discounted homes should increase on the same basis as rent increases for longer-term (market) tenancies within the development.
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How should affordable private rent be calculated?
Affordable private rent should be set at a level that is at least 20% less than the private market rent (inclusive of service charges) for the same or equivalent property. Build to rent developers should assess the market rent using the definition of the International Valuations Standard Committee as adopted by the Royal Institute of Chartered Surveyors.
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Is affordable private rent the only form of affordable housing permitted on build to rent schemes?
It is expected that developers will usually meet their affordable housing requirement by providing affordable private rent homes. However, if agreement is reached between a developer and a local authority, this requirement can be met by other routes, such as a commuted payment and/or other forms of affordable housing as defined in the National Planning Policy Framework glossary. The details of this must be set out in the section 106.
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How can the proportion of affordable private rent and level of discount be flexed?
Both the proportion of affordable private rent units, and discount offered on them can be varied across a development, over time. Similarly it should be possible to explore a trade off between the proportion of discounted units and the discount(s) offered on them, with the proviso being that these should accord with the headline affordable housing contribution agreed through the planning permission. All options should be agreed jointly between the local authority and the developer as part of the planning permission, and set out in a section 106 agreement. Guidance on viability confirms that viability studies for build to rent schemes can be customised in this way.
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Scheme management
How should affordable private rent and market rent properties be managed?
Affordable private rent homes should be under common management control, along with the market rent build to rent homes. They should be distributed throughout the development and physically indistinguishable from the market rent homes in terms of quality and size. They will not need the separate involvement of a registered landlord. Combining the 2 tenures this way improves viability and any alternation of units between affordable private rent and market rent over time is made easier.
The process for managing affordable private rent units should also be set out in the section 106 agreement. This should set out the parameters of the lettings agreement, the rent levels, apportionment of the homes across the development, a management and service agreement, and a marketing agreement setting out how their availability is to be publicised.
The section 106 should also require build to rent scheme operators to produce an annual statement to authorities, confirming the approach to letting the affordable units, their ongoing status, and clearly identifying how the scheme is meeting the overall affordable housing level required in the planning permission.
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What happens if homes within a build to rent scheme are sold off into separate ownership?
Build to rent schemes would normally, by definition, remain within the rental sector, under common ownership and management, for the long term. Any affordable private rent homes included as part of a scheme, through a section 106 agreement, are provided specifically as a community benefit in perpetuity. The sale of a build to rent scheme, or the sale of individual homes within the scheme to other tenures, should not result in the withdrawal of the affordable housing contribution from the local community.
Circumstances may arise where developers need to sell all or part of a build to rent scheme into owner occupation or to multiple landlords or, exceptionally, to convert affordable private rent units to another tenure. The section 106 should consider such scenarios and, in particular, include a mechanism to recoup (‘clawback’) the value of the affordable housing provision that is withdrawn if affordable private rent homes are converted to another tenure.
Consideration should also be given to a covenant period for the retention of private market rent homes in that tenure and potential compensation mechanisms in the event that private market rent homes are sold before the expiration of an agreed covenant period.
Planning authorities should recognise that build to rent operators will want sufficient flexibility to respond to changing market conditions and onerous exit clauses may impede development. However, the sale of homes from a build to rent development should not result in the loss of affordable housing without alternative provision being made.
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How should the clawback arrangement be structured?
The section 106 should set out what should happen if any homes within a build to rent scheme are disposed of including the withdrawal of affordable private rent homes at any time, or conversion of private market rent homes to another tenure before the end of a covenant period. This can take the form of alternative provision of other affordable housing, as defined in national planning policy. Alternatively, clawback arrangements can be used, the proceeds of which should be spent on the provision of alternative affordable housing, for the benefit of the community. The following is a formula that may be used to calculate the amount of clawback payable when affordable private rent homes are withdrawn.
Clawback sum = D x E
where:
D is the price at which the home(s) withdrawn from Affordable Private Rent are sold
E is the percentage discount that had been applied to the rent in respect of the Affordable Private Rent home(s) being sold
For example, if the home had a sale value of £500,000, and the discount level is 20%, this would generate a clawback of £100,000.
It is for local authorities to decide how to structure any clawback arrangement for private market rent homes. Clawback could be calculated by reference to viability and values at the time of the original application, or values and viability when the scheme is sold. One approach could be for authorities to encourage developers to submit 2 sets of figures when applying for the original permission, i.e. one for a ‘build to rent scenario’ and another for a ‘build for sale scenario’. This would provide certainty and clarity for all parties as to all the initial values applying to the scheme, including the affordable component under a sale scenario, in the event that all or part of the build to rent scheme is sold.
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How is eligibility to occupy affordable private rent homes determined?
Eligibility for occupying affordable private rented homes should be agreed locally between the local authority and the scheme operator, but with regard to criteria set out in planning guidance. This will ensure a consistent approach to eligibility assessment across the country and reduce any risk of delay in considering build to rent applications.
Final decisions over the occupancy criteria for affordable private rent homes should be made by the build to rent scheme operator, working with the authority, taking into account the criteria below. The eligibility criteria for the affordable private rent homes should be set out in the section 106 agreement. Authorities must take a reasonable position in negotiating occupancy criteria with build to rent developers, and eligibility should not constitute grounds for refusing planning permission.
Eligibility should be determined with regard to local household income levels, related to local rent levels. Where authorities maintain an ‘intermediate housing list’ they may wish to suggest names from this, or potentially even their Statutory Housing list, taking into account the affordability of the homes to those on the list. Authorities should refrain from having direct nomination rights from their housing list.
In the absence of an established local intermediate housing list, developers and authorities may consider assembling a unique dataset for the development. In so doing they should have regard to the local authority housing allocation policies and any relevant potential candidates from the Statutory Housing list. The list should also ideally include evidence about peoples’ local residence or employment connections.
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How is a longer tenancy policy applied to build to rent homes?
The national policy definition of build to rent in the National Planning Policy Framework glossary states that build to rent developers will as a norm offer longer tenancy agreements of 3 years or more to all new tenants who want one. These are sometimes known as ‘family friendly tenancies’ since they provide longer term security and stability for those who wish to settle down within a community. To implement this policy, developers and authorities should observe the following steps:
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In granting planning permission for build to rent developments, authorities should set in place a planning condition requiring scheme operators to offer tenancies of 3 or more years to all tenants in the development, who are eligible to live in the country for that period (under the right to rent). This should apply to all tenants, whether paying market rent or affordable private rent.
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There is no obligation on customers to take up the offer of a 3 year tenancy. They may prefer a tenancy of 6 months, 1 year or 2 years, and companies should offer these as an alternative, if requested.
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Where the rent or service charges are to be reviewed during the period of the tenancy, the basis for the review and for calculating the increase (whether as a fixed percentage or index linked to inflation) should be clearly set out in the tenancy agreement.
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Periodic rent and service charge reviews will also help to ensure there is an appropriate ongoing match between the occupants of the affordable private rent homes, and their income levels.
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Tenants should not be locked into longer tenancies for the full period of the agreement. Tenants should have the option to terminate at 1 months’ notice, after the first 6 months, without a break fee being payable.
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There may be periods during the operation of a build to rent scheme when the offer of longer tenancies would interfere with planned refurbishment works. In such circumstances it would be permissible to offer shorter tenancies, running up to the date of the scheme refurbishment.
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Should build to rent homes meet additional minimum standards?
Build to rent homes are normally designed, constructed and managed to a high quality standard. Individual schemes should meet any relevant local and national planning policy requirements. Affordable private rent homes within any particular scheme should be constructed and managed to the same high quality standards as the private rental homes. There are no extra national standards in addition to this.
There is no national requirement for authorities to apply national space standards in their area. Space standards are optional. Where authorities choose to apply them the national policy does not preclude authorities from dis-applying them for particular parts of the local plan area, or for particular development types, such as build to rent schemes.
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