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24 May 2024

End of recession may see emergence of build-to-let trend

By Graham Norwood

There's much discussion in the UK of a new trend likely to emerge when the recession is over – years away though that may be. It is build-to-let, a grown up version of buy-to-let. It works like this.

Developers who in the past specialised in city centre schemes of flats to sell to individual landlords will no longer rely on off-plan sales (lenders won't give mortgages for them) nor on speculative building (as share holders won't want the risk). So at an early stage a large investment fund or corporate investor underwrites the scheme in return for long-term returns from renting the units out. The developer itself, or an agent it employs, manages the rentals.

To increase returns and reduce overheads, the high service charges that we see on modern buy-to-let homes (to fund concierge services or gyms) will be capped, so the properties will be more functional. Some developers and some real estate consultants are already hard at work on how this would work in the UK, some looking at how it has worked in the US since its introduction in 2005. It's a success over there, so long as the developments are large to produce substantial economies of scale.

It may end what the Americans call 'Mom and Pop' investors, their equivalent to the UK's buy-to-let amateurs, although if Real Estate Investment Trusts take off in the UK, there will still be good opportunities for small-scale investors.

As the dust of the recession settles, so build-to-let may emerge. If so, you read it here first.