Northshoring drives build-to-rent growth in the regions
“Fundamentally, everyone wants to own their own home,” says Jonathon Ivory, the UK managing director of Atlas Residential. “That’s our central thesis.”
It may not be a controversial statement, but it is perhaps a surprising one to hear from a firm focused entirely on the rental market. Surprising, at least, until the changes that have shaken the residential property market in recent years are factored in.
Build-to-rent (BTR), once the niche newcomer of the sector, is threatening to be a game- changer. A combination of rising house prices, constrained land supply and a more transient job market has created a whole new generations demanding high-quality purpose built housing.
The British Property Federation (BPF) has been tracking BTR developments for the past two years. At the end of last year, it calculated that there were just shy of 96,000 units either completed or planned across the UK, but fewer than half of those were either fully built out (17,000) or under construction (24,000).
While demand is hard to gauge accurately, the assumption across the sector is that it is very far from being met. And despite a growing number of deals, the BTR market is still a little wet behind the ears.
“It’s growing all the time in terms of the spread of opportunities people are looking at,” says Simon Scott, head of residential investment at JLL. “We are a few years from that exponential shift in terms of the maturity of BTR, but it’s certainly coming.”
The BPF figures show that London is still the home of BTR, with 55,000 units built or planned in the capital compared with 41,000 in the rest of the country. But with yields on BTR developments in London and the South East still relatively tight, it is in regional cities that the greatest opportunity in this burgeoning subsector could be found.
Iain Murray, managing director of LIV Consult, who says he is “continually surprised” by how rapidly the BTR sector is growing, notes a shift in developers’ and investors’ interest from inner London to outer London and, more prominently, from London to the regions. “Apart from obvious interest in the top five cities, there is emerging interest in secondary towns as well as rural locations where BTR is being seen as a potential component of out-of-town masterplans,” he says.
It is a trend that began to take hold in 2017 according to Ian Fletcher, director of real estate policy at the BPF. “The dots on the [BTR] map are a lot further spread than they were,” he says. “A year ago, Manchester and Liverpool were strong outside London but that was about it. Now you’ve got Leeds, Glasgow and Birmingham with significant BTR activity and local authorities that are supportive of the sector. It’s also popping up in places like Dundee, Southampton and Norwich.”
Ivory insists that BTR “is not a zero-sum game where regions benefit at the expense of London” but acknowledges that it “probably is the case” that the latter offers a more attractive proposition for investors.
Atlas itself has big ambitions for the BTR sector. The US company has targeted a 10,000- unit portfolio in the UK and says it wants to invest £3bn to build it. Notably, two of its first three developments are not located in the South East – instead it has chosen to build in Birmingham and Manchester. The other is in Southampton.
“There are a lot of positive news stories coming from cities like Manchester, Birmingham, Leeds and Bristol,” says Ivory. “They all display the kinds of ingredients investors look for: positive job and population growth, proximity to good transportation, being close to retail and things like that.
“Those fundamentals make the regions look more attractive on a risk-adjusted basis, given yields are wider than they are currently in London.”
Looking at the big six
Clearly, yields are key when it comes to where to locate BTR schemes. Scott estimates that a development yielding 3.5% to 4% in London would generate 4.5% to 5% in most of the ‘big six’ regional cities.
These cities – Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester – as well as those Ivory describes as the “tier-two cities”, such as Nottingham, Sheffield, Liverpool and Newcastle, all have large student populations. But another quality has been an even bigger factor when developers come t identify BTR opportunities: the employment market.
Birmingham is perhaps the biggest beneficiary of what has come to be known as ‘northshoring’, whereby large corporates or financial services firms move major swathes of their back- and middle-office functions out of a prohibitively expensive London commercial market. Both Deutsche Bank and HSBC have set up major offices in England’s second- largest city and the effect on the local property market could prove transformational.
In December, specialist rental developer Moda secured planning permission for a 481-unit scheme on Broad Street. When completed, the 42-storey tower will be the tallest in the city. But Moda’s skyscraper is just one of a wave of major new BTR developments in Birmingham, with more than 2,500 units at various stages of planning.
Moda is not alone in targeting Birmingham. Atlas, L&G and Seven Capital also have a toehold in the city’s BTR market. “There are several schemes over the next year of 200 to 300 units,” says Philip Jackson, director of Birmingham-based agent Maguire Jackson. “What impact that has on the market, we’ll have to wait and see; they need to be that size and more to get the efficiency they want.” Birmingham is benefiting from “disgruntled” South East investors who see more certainty in the yield and in values there over the next five years than in the South East, he says. “A lot of investors coming into Birmingham see potential because of HS2, HSBC bringing its retail bank here and HMRC moving 3,500 staff here. They anticipate further growth in the region. Deutsche Bank has been very successful and other people are now picking up on that.”
Another thread running through the cities and regions that are likely to see a surge in BTR activity in 2018 and beyond is that, like Birmingham, they tend to be places that have been handed a degree of devolved power, often with metro mayors. “It’s not unrelated that towns and cities that have devolved or pro-business local authorities see more inward investment than those that don’t,” says Ivory.
Scotland in the spotlight
This is playing a part in Scotland, where Glasgow and Edinburgh are likely to be high on the agenda for BTR developers in 2018 and beyond. First, investors and developers will need to come to terms with new residential tenancy rules that came into effect north of the border in December. Once they have, activity is expected to ramp up.
“My suspicion is we will see a lot more activity in Scotland as the investment community understands exactly what that new legislation actually means,” says JLL’s Scott.
While the regions are becoming increasingly attractive, London is still the location for the majority of BTR schemes. However, even those developers previously focused on the capital are looking beyond the M25.
Get Living, one of the tenure’s pioneers, is best known for its redevelopment of the London Olympic Village into the 1,500-home East Village. That development will eventually provide 3,500 units, with the developer’s full portfolio in London stretching to beyond 4,000.
However, Get Living’s next major developments will be in Glasgow and Leeds, with 700-unit schemes in each currently in planning. For Neil Young, chief executive of Get Living, diversifying the location of developments is about growing the brand and showing that high-quality purpose-built rental accommodation can be a genuine choice for an increasing number of people.
“For people to be able to have that brand recognition when they move between cities, that’s part of what we are offering,” he explains. “We want sites with at least 500 homes so we can create the place, create the neighbourhood; it’s not just about the residential but also the retail offering and the public realm.” This focus on quality will help the subsector to become better recognised.
Young insists that BTR has “not yet reached maturity” as an asset class but notes that there is greater acceptance of it. “People are more confident investing in it but it’s still quite early days,” he says. “The more organisations that are doing it, the more consumers will understand it and be looking out for it.” LIV Consult’s Murray agrees: “Reports of any slowdown in BTR investment are greatly exaggerated,” he says. “This market is not likely to mature in the foreseeable future.”
One thing that could hold back any serious surge in BTR in 2018, whether in London or the regions, is planning. Although last February’s housing white paper outlined changes to the National Planning Policy Framework to encourage BTR developments, most of those in the sector still see planning as a potential barrier to growth.
As the BPF’s Fletcher says: “Planning is sclerotic: it takes too long, it’s too bureaucratic. We’d like to see planning authorities have more resources to process more applications quicker. The time it takes to work schemes through planning is having a detrimental effect on the UK’s ability to deliver housing.”
Building them out quickly might be a challenge, but there is little doubt that there will be more BTR schemes in the pipeline over the next year and it is highly likely that the majority of new dots on the BPF’s map will be outside London.
Atlas is not alone in believing that most people want to own their own home, but nor is it the only company now recognising that an entire generation of potentially lifelong renters have been poorly served by the market for years.
With the government also apparently accepting that housing policy cannot focus on private sale alone if it is to address what has become a chronic shortage, BTR is certain to be part of the solution. “If it can increase numbers, rather than be substitutional, then that would be a success,” Young says.
All eyes will be on the BTR sector over the coming years as it edges towards maturity. And not just in London, but increasingly in the regions too.