Telford Homes expects build-to-rent housing construction for institutional investors to account for more than half of its development pipeline before the end of 2019 and increase after that.
But while this is expected to bring the business greater security, the de-risking comes at the expense of profitability, it said.
In a trading statement today, the board said: “We continue to view build-to-rent as being the future of increasing housing delivery in London. The proportion of Londoners renting is rising and will continue to do so with customers increasingly turning to a rental model, not just due to affordability, but more as a lifestyle choice looking for greater flexibility. Purpose built rental housing delivers better customer amenities, improved on-site service and secure tenancies and is the ideal product for new generations wanting to live in London.”
It added: “This shift in strategy is set to continue and we now expect to take this further than previously indicated, especially given current market conditions for both individual investors and owner-occupiers. This means we will be operating at lower margins as the profitability of build-to-rent is less than traditional individual sale developments but this is in return for removing all market risk, requiring no external debt and limited equity investment generating a much higher return on capital.”
The trading statement also revealed the company’s frustrations with the planning system, which is also impacting on profits.
“We have also experienced some frustrating challenges in achieving planning consents on some developments including most notably LEB Building in Bethnal Green. Planning delays can increase financing costs, push back the timing of profit recognition and impact on our ability to invest equity into new opportunities, particularly those for individual sale homes where our equity is expected to be invested for a longer period of time.
“Finally, we have experienced a disappointing delay to the construction programme at City North in Finsbury Park of approximately six months due to matters outside of our control in dealing with transport bodies and the need to coincide with works undertaken by third parties. Given that completions were largely due in the second half of FY 2020 this will have a significant impact in terms of moving profit of around £15m from FY 2020 and into FY 2021.
“These factors, combined with the impact of lower margin build-to-rent transactions, are changing our total profit expectations for the next few years. Consequently, given the £15m profit deferral to FY 2021 from the delay at City North, we now expect profit before tax for FY 2020 to be significantly below FY 2019. After FY 2020 total profits in each year will grow again, albeit at lower overall margins, underpinned and then accelerated by our increased focus on build to rent and the improved capital returns it brings.”
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