Single family rental (SFR) is attracting significant interest from both renters and investors. To help you navigate this promising landscape, we've created a series of short videos to provide you with key recommendations on various stages of a successful SFR portfolio.
In the next instalment of our Market Masterclass series, senior associate Joanne McDaid discusses the nuances of land acquisition, its role in SFR and her top tips to consider.
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Joanne McDaid: Since 2022, we are seeing an increasing amount of instructions from our clients where they are selling land to investors who are buying in single family rental units.
We have always seen a PRS or a build to rent asset class but it has always been predominantly associated with more urban city apartment buildings; but what we are seeing is a growing trend in the regions and suburbs and on more traditional housing developments where the sellers are selling quite large chunks of housing stock for single family rental.
So the top tip here is when you are looking at your permitted disposals, whether it is to do with overages, servicing obligations, anything like that, you need to make sure that your permitted disposals covers and is wide enough to cover an opportunity for single family rental units to be sold in the future.
So my second tip is about reliance reports. So an investor who is buying in single family rental units will need to rely on reports, the developer's reports in relation to planning permissions and just the development in general; so they will need this reliance which is above and beyond what the developer would usually need to provide to a buyer if they are only buying an open market property.
So where our client is the one that has commissioned the report then that is fine. They will be able to build in what they require for any future single family rental purchaser and this is what our construction team are often working on with our clients. It is where our developer client has acquired land and is relying on the previous landowner's reports by way of reliance letters.
So the reliance letters we need to make sure – so this is my tip – the reliance letters need to make sure that it is addressed to the developer.
At the same time where our client has not commissioned the report and they are acquiring the land, they will be acquiring a reliance on the reports by way of reliance letters.
So what we need to really push for here is that the reliance letters are addressed to our client but also allows for our client to call for a reliance letter or further reliance letters to be addressed to other institutions, for example funders or housing associations, so this will enable in the future if they are to then sell single family rental units on to an investor, that investor will be able to have their own reliance letter and be able to rely on reports that have already been put in place.
So my third and final tip is to do with adverse covenants. So our clients, when selling single family rentals across to an investor, the investor will want the really smooth path between exchange and completion of the disposal of their single family rental unit.
Now, of course, this is always what our clients want, but once the investor has committed their funding at exchange, we need to ensure that there is no delay or anything that basically causes an issue and a delay to those final disposals. Up to the point of exchange the investor will have the opportunity to perform all their due diligence and make sure that they are comfortable with the title.
After this, however, between exchange and completion, especially when we have got massive developments, there is obviously the risk that encumbrances and adverse covenants can start to appear. So for example something to do with infrastructure or when they are selling on other plots to other affordable housing units, so anything like that.
So in order for this protection between exchange and completion to take place, the developer will have obviously contractually said that they will not encumber the title between those points, but what we are also suggesting as a tip is to actually put a unilateral notice or a restriction on those units between exchange and completion.
Now this will protect both the investor, because they will have the comfort that the title will not be encumbered in that period of time, but also it will mean that the developer will not inadvertently put anything on the title which is going to those single family units.
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