Build-to-rent blowback: How a tax change axed 25,000 homes overnight

 

MDR is a stamp duty tax relief where the purchase of multiple properties benefits from an ‘average’ rather than aggregate stamp duty land tax (SDLT). SDLT is not cumulative of each home but an average of one.

“The value of purpose built rental is the income stream it generates and not the building itself,” says BTR special adviser James Pargeter. “You may sell it to another owner who invests in that. That’s when MDR kicks in.” 

 

Abolishing MDR was part of a general aim by HM Treasury to simplify tax regulations, to target rogue private rental sector (PRS) landlords, and to prevent a loophole exploited by some private players dividing large estates into multiple transactions to benefit from relief. It was likely also directed at negativity around increased density of houses in multiple occupation (HMOs) and the strain they put on local services, infrastructure and property prices.

 

But the government overlooked or underestimated the impact that reversing MDR – which had been introduced in 2012 to stimulate investment – was having on the purpose-built rental sector, and specifically Build to Rent.

 

“Similar to the Renters Reform Bill, the abolition of MDR has affected the entire rental sector. But taking a measure to target relatively small rogue players at the smaller end has an adverse effect on the rest of the market,” Pargeter adds.

 

In this housing ‘permacrisis’ – as the 2024 Radix Big Tent Housing Report dubs it – it is essential to recognise the diversity of the housing ecosystem in the UK. This includes Build to Rent, which has burgeoned in the last decade. The number of BTR homes in planning, under construction or complete is 273,700.

 

Yet the purpose-built rental sector in the UK still seems entrenched as a second-class tenure, by both media and government. Leveraging this type of development is key to meeting the Labour government’s ambitious housing target. Build to Rent homes can be delivered faster and are not dictated by sales rates. They are not just multi-family apartments but single-family dwellings too, encouraging growth outside city centres.

 

“We need to make the purpose built rental sector the standard third tenure group,” says Pargeter. “We are familiar with politicians looking at home ownership and affordable housing. But the bit in the middle – Build to Rent – addresses the people who can’t access either side of that polarised system. Particularly at times of their lives when flexibility is as important as affordability.”

 

 

BTR accounts for less than 2% of the UK total housing market, unlike in other countries, such as the USA where purpose-built rental represents nearly a third of the market. However, with the realisation that investing in BTR is positive for investor portfolios, helping to diversify them and spread risk across multiple properties, BTR is finally starting to attract increasing domestic and international investment in the UK. This means more competition, driving up the quality of homes as well as improving affordability. 

 

As a consequence of the abolition of MDR, investors have had to adjust strategies and budgets to compensate for the increase in tax liability. A seemingly minor tax relief to the Treasury has significant implications for investor sentiment. When a return on BTR schemes is typically only 4-5%, any undermining makes it a less appealing investment prospect. Brendan Geraghty, CEO of the Association for Rental Living (ARL) says: “The removal of MDR impacts forward funds and forward commits in the future – either the ability to compete for land, or for developers who would have had the benefit of the additional pricing, further straining the current market.”

 

 

Grainger plc – ‘the UK’s largest listed residential landlord’ – has declared £60m wiped off their annual financial statement, purely due to MDR. Kurt Mueller, Director of Corporate Affairs says: “After the tax changes were brought in by surprise, the industry warned that the Treasury’s attempt to close a loophole would inadvertently hit new institutional investment into new housing delivery, and particularly hit investment in the North of England hardest. We believe there’s a simple tweak to the tax changes that would continue to encourage house building at scale (build to rent) but keep the loophole closed, and we continue to make the case to Government.”

 

The Radix report calls on the government to engage with institutional investors (such as local authority pension funds) and private developers as well as volume housebuilders. “A level playing field for tax, and clear plan for the delivery of future developments, will best deliver high quality, sustainable and affordable housing both for sale and for rent… that level playing field needs to be set up for institutional and private landlords – where policies such as the removal of Multiple Dwellings Relief… have significant negative impacts on investor and landlord appetite and ongoing viability.”

 

While the abolition of MDR has instantly affected the viability and valuation of schemes, in the longer term it could also impact the location (proximity to infrastructure), density (making single-family homes look more viable), affordability (the increased acquisition cost reflected in rents) and quality of BTR developments and operations.

 

Consequently, BTR investment may well be skewed towards prime locations and urban centres which have a high demand for rental property and established infrastructure. This would limit the spread of BTR to the less connected areas that need it. London currently accounts for 43% of the UK’s operational BTR developments. According to Paul Winstanley, Head of Residential Strategic Advisory, JLL as quoted in BTR News: “MDR has also been a critical component of levelling up regional UK investment in Build to Rent, with the biggest Stamp Duty Land Tax (SDLT) savings being experienced in areas where average capital values were lower. This incentive will now be lost and places more pressure on viability for Build to Rent developments, including those on brownfield land, in the pipeline.”

 

 

There’s evidence BTR brings scale of new homes, long-term investment and professional rental standards. The Quality of Life Foundation has just released a report ‘Assessing the social impact of build-to-rent developments on residents and local communities’, following three schemes by Greystar, Get Living and Long Harbour/Way of Life that show long-term community wellbeing benefits due to the attention to customer experience in BTR. Further analysis identified in the Radix Report shows that BTR schemes do deliver faster absorption rates (the rate at which new homes are leased) than for-sale only schemes as well.

BTR needs to be understood as distinct from the private rental sector that the abolition of MDR was directed at. Recognising this challenge, a ‘Build to Rent Taskforce’ was announced last week, bringing together 24 industry professionals to promote BTR and raise awareness across local authorities, decisionmakers and policymakers of BTR’s benefits, contribution to housing need and investment into communities.

 

The abolition of MDR is a sign of a government still blindsided about the benefits of Build to Rent and the vital part it plays in a diverse housing spectrum. The incoming Labour government is prioritising ‘affordable housing’ but investment needs to be stimulated across the board and not stymied. Confidence is key to securing investment and the removal of MDR is not only counterproductive but undermines the sector. BPF and others continue to lobby HM Treasury for MDR to be reinstated. To meet government housing targets time and confidence are of the essence.

 

 

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Harriet Saddington is a writer and architect with a background degree in architectural history who works with architecture practices and developers with a focus on social impact