The burgeoning UK build-to-rent (BTR) market has been more than just a topic of conversation for some time now. It is widely reported that the number of UK residents renting privately has doubled over the past decade due to a change in mindset in relation to home ownership and the rising cost and poor supply of new homes. Into this fast growing gap between social housing and home ownership, the BTR model has given property developers a lucrative opportunity and has attracted billions in investment, and it is forecast to grow further as the market matures and diversifies.
In this article we address the current state of the market and how we think we are now coming close to a split in the BTR sector between those trading/investing and those genuinely concentrating on building/developing.
The BTR model allows property investors to achieve consistent long-term investment returns as they have the capital to develop bespoke blocks of apartments, which can be let out and managed long term by a single company rather than being sold to individual landlords. However, until now there has been pretty much no built and trading portfolios of purpose-built BTR accommodation. This has led to many investors becoming reluctant developers.
We have also seen the benefit to tenants of this model, as it gives them more choice and offers better property management and security than those services currently offered by small-scale landlords (often individuals). BTR is also attractive to the government and planning authorities as they see that it offers a way to generate long-term income for developers and investors whilst still meeting housing targets and needs. The units can be delivered faster than housing for sale because there is less risk of market saturation and bigger schemes are capable of being built, as can be seen at Wembley Park where Quintain is currently delivering 5,000 units as part of London’s largest development.
Examples of those investing in BTR schemes have received much publicity in recent years, but the potential sale of the business (to include Tipi, the rented homes brand) of the Wembley Park development indicates that there is a real appetite for foreign investors in purchasing BTR units on a large scale, despite Lone Star’s recent withdrawal from the sale. The potential sale arose just as residential property in London came under pressure, with house prices falling at the end of 2017 for the first time since 2009. This was due to the uncertainty of Brexit and low pay increases and it was an almost unique opportunity to buy directly into a brand with an operational development business and enormous pipeline. Lone Star’s decision to put Wembley on the market partway through development shows two things: that we are still not quite at the point of having constructed and stabilized stock at scale in the market and that foreign investment is very keen on buying big ticket BTR schemes.
Having schemes like Wembley on the market also demonstrates one of the noticeable trends from foreign investment over the last five years. Namely that London provides an opportunity for investors to pick up enormous single asset deals. This enables them to move quickly into a new market and concentrate their efforts on one decision. This opportunity doesn’t occur elsewhere, other than in a few markets in North America and the Far East (New York, Tokyo, etc.).
BTR is not only concentrated in London, as house prices are also increasing in the East and South East of England. Areas such as Cambridge are also facing major development constraints coupled with intense housing demand. Manchester, Liverpool and Bristol are also considered to be hotspots for rental-focused development.
Examples of those investors investing outside of London include Legal & General, which has set up a fund with Dutch pension fund PGGM with the potential for the fund to expand once initial developments are built. The fund will start with developments of a total of 650 homes in Bristol, Salford and Walthamstow. Gatehouse (a Kuwaitiowned investment bank) has at least two BTR funds, with more than 1,600 homes having been built in projects worth a combined total of c. £250 million. The high-quality homes are in the Midlands and North West of England and are designed for family use.
It is fair to say that the funding pipeline is still evolving, but trends so far indicate that developers have largely followed a forward fund model where the developer builds the asset, but the investor lets and manages it. This can often lead to a discount to stabilized market value where the investor is taking some element of development risk and a blurring of the development and funding roles. Developers are keen to develop through to stabilization in the BTR sector where sites are viable, but they face challenges with securing debt and persuading their boards to accept longer risk profiles. In addition to these longterm cash flow issues, it is also significant that when a BTR scheme is valued upon completion, it will generally be valued lower than an unencumbered identical property which can be sold on the open market. But as more stock starts to complete and trade, and confidence and data improves, it is likely we will move towards a new balance between development, investment and operational aspects. It is likely we will then finally see a clearer split between the development and investment markets, allowing an emergence of trading sales rather than forward funds. Wembley showed the appetite for structural changes within the market, but until shifts in funding and more assets become stabilized, we will still not see the clear demarcation seen in other asset classes.