UK housing: Next generation rent
Build-to-rent housing in the UK is growing up fast. And, it is learning tricks from the hotel and student accommodation sectors, says James Duncan
According to recent real estate data, there are 105,214 build-to-rent (BTR) homes either completed or planned across the UK, with just under 60,000 units in London. This is from a standing start just a few years ago, demonstrating the significant growth in an emerging asset class.
BTR homes are built at scale for the primary purpose of being rented long-term. They boost choice and quality in the so-called private-rented sector, helping those currently priced out of the market and offering a more family-friendly rental option. As such, it is increasingly being recognised that BTR should be a key part of the nation’s housing mix and the government has been introducing policies to encourage its delivery. For example, Quintain’s Wembley Park scheme, the biggest development of homes built specifically for private rent in the UK received a £65m boost from the government.
Institutional investors have traditionally shied away from investing heavily in residential, seeing it as posing too much reputational risk. However, there has been a particular focus from the government to attract institutional investors to BTR, recognising their importance to increase the scale of the asset class needed to meet demand.
With the success of projects based on the amenities on offer and access to transport links, BTR offers institutional investors an attractive route into the residential market. It may be a different tenure, but BTR displays many of the same qualities as hotels and student accommodation, which have been so successful at attracting institutional investment. And, importantly, the investment considerations are similar. BTR schemes should not be seen as speculative property development. They provide long-term, index-linked returns that can match insurance and pension liabilities.
Where previously pension funds and insurance companies may have invested in the hotel sector or student accommodation, BTR is proving to be the new kid on the block. And like all new kids, it’s learning from the stalwarts. We have seen an increasing convergence between ground-rent investment, hotels, student accommodation and BTR as asset classes, with many BTR schemes designed and run like boutique hotels. The focus is on the ‘experience’ and the brand. And, like hotels – and today’s upmarket student digs – developments are furnished with the latest technology, and communal spaces are designed to facilitate social interaction and ‘co-living’ – providing more than just a place to rest your head and offer a readymade community.
All part of ‘placemaking’, BTR developments increasingly include traditional hotel facilities and services, such as roof terraces, gyms, media rooms and concierges that cater to residents’ every whim. These value-add amenities, which aren’t available in other forms of privately rented accommodation, allow BTR operators to charge a premium. There is a concern that this is leading to an ‘amenity arms race’, with schemes competing with ever more fantastical facilities to attract and keep long-term renters. But in today’s world of instant gratification and aspiration, living a hotel lifestyle in apartments that are managed and serviced is becoming the norm.
It is also this instant placemaking that makes BTR such a significant draw for institutional investors. Operators as well as investors want to see fully occupied buildings with capital deployed quickly, instead of spreading the risk over several years, as happens with much large-scale for-sale residential development, which is delivered in phases. This means the scheme isn’t a perennial building site – a significant draw for prospective renters guaranteeing immediate income and return on investment. BTR projects also minimise investment lag as they lend themselves to modern methods of construction, such as using modular units, which reduce development risk in terms of cost and time. These faster and more reliable building methods also mean there are more, and better, options for development finance.
Unlike in the US, where the developer manages the entire development lifecycle of a BTR scheme from site location to financing and managing the homes, the UK model is much more fragmented, involving a number of parties at various stages. This offers diverse investment opportunities for different types of investors. For example, using risk capital, private equity or debt to enable first-stage investors to benefit from uplift in the underlying land values, and pension and insurance funds to take the resulting long-term indexed income.
Indeed, institutional investors do not want to be involved in the end-to-end delivery of a scheme. They do not want to be responsible for the management of buildings and want to avoid being tenant-facing; it is too much of a reputational risk and they do not have the necessary skillsets. Instead, we’re seeing a new breed of developer-operators with their own separate BTR divisions and management companies that are client-focused – some even developing their own tech management platforms with apps that do everything from reminders to pay rent on time to invitations to weekend barbecues.
Yet BTR is not, and should not, be just for Millennials or ‘Peter Pans’. Nor is it just expensive ‘hipster housing’. Unlike the majority of privately operated student accommodation, as the BTR market matures and demand continues to increase, the range of product on offer will broaden with different levels and types of amenity at various price points. This doesn’t mean compromising on quality. BTR developments provide people with a different model of housing that can fit with their lifestyle.
Hotels receive significant investment from listed funds, providing investors with plenty of financial information to aid investment decisions. There is also a degree of certainty around the already deep student accommodation market. Conversely, BTR as an asset class is still in its nascent stages with limited data on returns.
As BTR schemes proliferate and residents move in, evidence-based metrics will become available to shore up investor interest and give greater assurances of expected yields around the country. As the data shows, everyone is talking about the BTR boom in London, but with lower land values outside the capital it is in the regions that more attractive yields may be found.
What will ultimately drive supply is demand. As we all know, there is a housing shortage and people are looking for options and different ways of living. But we’re still obsessed with homeownership in the UK and people still largely treat renting as a stepping stone to buying. With BTR schemes offering secure long-term leases, we need to learn from the US and continental Europe to evolve to a situation where renting is part of the norm and BTR is not perceived as a speculative asset class.
With house prices rising in urban centres and people unable to get onto the property ladder, BTR is an important part of the solution to the nation’s housing crisis and is already playing an important role in raising standards across the rental – and wider residential – sector. Developers, investors and crucially, local authority planning departments are beginning to recognise this, ensuring that BTR development will continue to go from strength to strength.
James Duncan is a partner and head of PRS at Winckworth Sherwood
Institutions earmark £8bn for UK housing
There is no let up in interest in UK residential property, according Investment Property Forum
Most institutional investors active in the UK’s housing market plan to increase their exposure. Some £8bn (€9bn) has been earmarked for the sector over the next year, according to the Investment Property Forum (IPF).
IPF’s residential survey shows that 80% of residential investors plan to increase investment this year, up from 60% a year ago. Three non-residential investors are considering investing.
The majority of capital will be channelled through development land (£4.4bn) and the purchase of existing – and newly completed – assets for private rent (£3.2bn).
IPF’s 2017 UK Residential Property report surveyed 56 investors, with £3.5trn, of which UK real estate makes up £240bn.
Of investors surveyed, 46 had exposure to UK residential. The 42 investors who provided data had £18.1bn, or 8.6%, of all UK real estate assets, the highest amount in the survey’s six-year history.
“Investment into the private-rental sector now accounts for half of the total, whilst development, for either investment stock or market sales, accounts for just under a quarter of the total investment in residential assets,” the report said.
The research indicated that institutional investment keeps growing as a result of the sector’s return profile and stable earnings. “Other important criteria are residential’s low correlation with other asset classes and its inflation-matching ability,” the report stated.
Stafford Lancaster, an investment director at Delancey Real Estate AM and chair of the IPF residential investment group, said: “This year’s survey reaffirms what many of us involved in this… sector know – that a significant amount of capital is looking to access it, attracted by long-run returns, diversification and significant undersupply, particularly at the more affordable price points.
“There remain barriers around viability, achieving scale and management, but the direction of travel is clear and this is good news for the UK’s housing crisis.”