WHAT IS BUILD TO LET?
Build to Let is commonly referred to as Build to Rent (BTR) and is a type of residential property development in the UK. Unlike typical residential projects that involve selling units to individual buyers, Build to Let focuses on creating rental homes for long-term tenants.
Although not new, and considering how difficult it is for first time buyers to get on the property ladder, it’s no surprise that build to rent (BTR) is a growing trend in the UK property market, where developers construct purpose-built rental properties for long-term occupancy.
BTR projects offer many benefits for both investors and tenants, such as stable returns and the ability to create substantial equity within the project, quality housing, and community regeneration.
Build to rent development finance for development projects can range in size from a block of 6 flats to a phased development of hundreds of flats, but how can developers and investors obtain build to rent development finance to fund a BTR development and what are the best strategies to maximise their returns?
In this article, we explore how build to rent development finance works along with the different funding options that are available, the benefits of investing in BTR and some of the challenges and opportunities that Build to Rent presents for the UK property sector.
HOW DOES BUILD TO RENT DEVELOPMENT FINANCE WORK?
Like most large-scale property development projects, it can be a complex process to attain Build to Rent development finance as amongst other things it requires a long-term commitment and a thorough understanding of the market dynamics and risks.
Therefore, developers and investors should carefully consider their build to let development finance options and strategies, and seek professional advice from experts such as an experienced commercial finance broker that specialises in build to rent finance, architects, surveyors and valuers, engineers and lawyers who can help them achieve their goals.
There are several ways to secure build to rent development finance, depending on the size, location, and stage of the development. Some of the most common funding options are:
BUILD TO RENT DEVELOPMENT FINANCE
Build to Rent development finance is readily available and involves borrowing from lenders who will charge interest and fees on the loan. Lenders can be banks, development finance lenders or specialist bridging lenders.
A lower cost of capital and a faster access to funds for the developer can be achieved with build to rent finance, but it also entails meeting the lenders’ criteria and obligations, such as providing security, covenants, and adhering to a repayment schedule.
Build to Rent development finance is designed for ground up new build developments, refurbishment projects and commercial to residential conversion projects and can be suitable for projects that have a risk profile up to around 70% of the Loan to Gross Development Value (LTGDV), a high level of certainty, a clear cash flow projection and a confirmed exit route in the form of a long-term commercial mortgage offer to repay the build to rent finance upon project completion.
Development exit finance can also be utilised to bridge the gap between project completion and the completion of the long-term commercial mortgage.
Build to rent finance lenders can also provide flexibility and support for the developer, and can offer different types of loans, such as senior debt, mezzanine debt or bridging finance, and provide guidance and advice on the project delivery and management.
However, build to rent finance can also be challenging, as it requires demonstrating the viability and profitability of the project to the lenders, and complying with their terms and conditions.
As with all types of property development finance, build to let finance lenders will require to see evidence that a satisfactory exit route from the build to rent finance is in place, a satisfactory exit route would be in the form of a pre-agreed long term commercial mortgage offer that would seamlessly repay the build to rent development finance upon the completion of the project.
In fact, many reputable build to let development finance lenders will also agree to provide the long term commercial mortgage finance offer prior to drawdown of the build to rent finance and then provide the long term commercial mortgage once the development project is complete and the new tenants are starting to move in.
Lenders may also have strict criteria and limitations for the project, such as the loan-to-value ratio, the interest rate, the loan duration, and the repayment schedule.
Therefore, build to let development finance may involve rigorous and costly due diligence and appraisal processes, as well as regular monitoring and reporting throughout the project lifecycle.
Most build to let finance lenders will insist that you surround yourself with an experienced professional team including Architects, Surveyors, Structural Engineers to name a few and an experienced commercial finance broker that can guide you through the application process.
Here at Evolve Finance we can guide you through the process of obtaining build to let development finance from our panel of development finance lenders to ensure that whatever size your development is we can provide the best finance solution for you and your project, we can also make the introductions to an experienced professional team if required.
EQUITY FUNDING
This involves raising capital from investors who will own a share of the project and receive a proportion of the rental income and capital gains. Equity investors can be institutional investors, such as pension funds, insurance companies, or private equity firms, or individual investors, such as high-net-worth individuals or crowdfunding platforms.
Equity funding can provide a high level of flexibility and control for the developer, but it also entails sharing the risks and rewards of the project with the investors.
Equity funding can be suitable for BTR projects that have a strong potential for capital growth, as well as a stable and predictable income stream. Equity investors can also benefit from the tax advantages of BTR developments and the ability to claim capital allowances for the construction and maintenance of the properties.
However, equity funding can also be challenging, as it requires finding and attracting investors who are willing to invest in build to let, and who share the same vision and objectives as the developer. Equity investors may also have different expectations and requirements for the project, such as the level of return, the exit strategy, and the governance structure.
Therefore, equity funding may involve complex and lengthy negotiations and agreements between the developer and the investors, as well as ongoing communication and reporting throughout the project lifecycle.
JOINT VENTURE FUNDING
This involves partnering with another entity, such as another developer, a landowner, a local authority, or a housing association, who will contribute to the project in terms of capital, land, expertise or planning permission. Joint venture partners can share the costs, risks, and profits of the project, as well as leverage each other’s strengths and resources. Joint venture funding can provide a more balanced and diversified approach to BTR development, but it also entails negotiating and managing the relationship and expectations of the partner.
Joint venture funding can be suitable for BTR projects that have a high level of complexity, uncertainty, or opportunity, and that can benefit from the collaboration and synergy of the partners. Joint venture partners can also provide access and influence for the project, such as securing land, obtaining planning consent, engaging with stakeholders, and delivering social value.
However, joint venture funding can also be challenging, as it requires finding and selecting a compatible and reliable partner, and establishing a clear and fair agreement on the roles, responsibilities, and rights of each partner. Joint venture partners may also have different interests and objectives for the project, such as the design, quality, and affordability of the properties, the target market and rent level, and the social and environmental impact.
Therefore, joint venture funding may involve complex and delicate negotiations and contracts, as well as clear communication throughout the development period.
BENEFITS OF INVESTING IN BUILD TO RENT PROJECTS
Developments that are funded by equity, joint venture or build to rent development finance can offer attractive returns for investors who are looking for long-term, stable, and diversified income streams.
BTR projects can also provide social and environmental benefits for the tenants and the communities, as well as support the UK government’s housing agenda and economic recovery. Some of the benefits of investing in build to let projects are:
Strong demand: The UK rental market is experiencing a high demand for quality and affordable housing, driven by demographic, economic, and social factors, such as population growth, urbanisation, affordability issues, lifestyle preferences, and changing work patterns. Moreover, the demand for rental housing is not evenly distributed across the country, but is concentrated in urban areas, where the supply of housing is constrained and the prices are high. BTR projects can cater to this demand by providing modern, well-designed, and well-managed homes that offer tenants the features and amenities they need, such as security, convenience, flexibility, and community.
Stable income: BTR developments can generate consistent and predictable rental income for investors, as they typically have longer-term tenancies, lower vacancy rates, and higher occupancy rates than traditional buy-to-let properties. According to the [British Property Federation], the average tenancy length for BTR properties is 18 months, compared to 12 months for the wider private rented sector, and the average vacancy rate for BTR properties is 5%, compared to 10% for the wider private rented sector. BTR projects can also benefit from rent indexation, which allows the rent to increase in line with inflation or market rates, ensuring that the income keeps pace with the costs and maintains its real value.
Equity Creation and Capital Growth: Developing a BTR project can create substantial equity within the development immediately upon the completion of the build project and also capital growth as property values naturally appreciate over time, as they are built to a high standard, maintained to a high quality, and located in areas with strong growth potential.
BTR projects can also benefit from economies of scale, as they can achieve lower operating costs and higher operational efficiency than individual properties and can also enhance the value of the surrounding area, as they can regenerate local communities, improve infrastructure, and create employment opportunities.
CHALLENGES AND OPPORTUNITIES FOR BTR PROJECTS
BTR is a promising sector in the UK property market, offering many benefits for both investors and tenants. However, not unlike build for sale projects BTR also faces some challenges and barriers that may hinder its growth and development. Some of the challenges and opportunities for BTR projects are:
Planning and regulation: Build to rent projects may encounter difficulties and delays in obtaining planning permission and complying with the planning and building regulations, as they may not fit into the existing frameworks and policies that are designed for traditional housing models. For example, developments may face issues such as the provision of affordable housing, the mix and size of units, the design and quality standards, and the parking and amenity requirements and therefore may require more time, resources, and negotiation to secure planning consent and meet the regulatory obligations.
Supply and competition: Although there is no shortage of funding options being led by build to rent development finance, BTR projects may face challenges and risks in securing and acquiring suitable land and sites for development, as they may face competition from other developers and sectors, such as the build to sell, the affordable housing, and the commercial sectors. For example, BTR projects may struggle to compete with the build to sell sector on price, as the latter can offer higher upfront payments and lower risk premiums to the landowners. BTR projects may also struggle to compete with the affordable housing and the commercial sectors on policy, as the former may have.
APPLYING FOR BUILD TO RENT DEVELOPMENT FINANCE: A STEP-BY-STEP-GUIDE
Before you begin the application process:
Consult with an Expert Broker
Reach out to an experienced broker that understands build to rent development finance. They can guide you through the intricacies of the process, help you explore available options, and provide personalised advice.
Understand How It Works
• Loan Stages: The loan is released in stages. These align with different phases of your development project—starting from the construction phase, through milestones, and finally upon completion.
• Build to let finance is secured against the property or properties you’re developing. If you fail to repay, the lender has the right to take possession of the property.
• Repayment Sources: Repayment typically comes from rental income once the properties are let or through refinancing to a lower interest rate long term commercial mortgage once the build project is complete.
Who Is It For? Build to rent development finance primarily caters to:
• Professional Property Developers: Those experienced in property development.
• Landlords: Individuals planning to develop multiple properties for letting.
• Developers needing to cover costs before rental income flows in.
Advantages
• Tailored Solution: Designed specifically for rental property development.
• Staged Funding: Aligned with project milestones.
• Secured Lending: Property acts as collateral.
• Income-Driven Repayment: Rental income or property refinancing.
• The ability to create substantial equity within the property.
Disadvantages:
• Strict Criteria: Lenders assess experience, track record, and project viability.
Application Process
• Provide Documentation:
• Detailed business plan.
• Financial projections.
• Evidence of your development experience.
Receive Heads of Terms: If your project aligns with build-to-rent criteria, you’ll receive initial terms within 24 hours.
Remember, thorough preparation and professional guidance are essential for a successful build to rent development finance application. Whether you’re building apartments, townhouses, or other rental properties, understanding this unique financing option can open doors to lucrative opportunities in the property market!
CONCLUSION
Build-to-rent properties are an attractive investment option for those who want to tap into the UK’s booming rental market and enjoy the benefits of steady income, capital growth, tax efficiency, and professional management.
Build to rent properties are designed to meet the needs and preferences of modern renters, who value quality, convenience, and community.
By investing in build-to-rent properties, investors can take advantage of the high demand and low supply of rental homes in the UK, and contribute to solving the housing crisis. With the ready availability of build to rent development finance, build to rent properties are worth considering in 2024, as they offer a scalable and sustainable solution for the future of the UK’s property market.
