The Case for Build to Rent

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The Case for Build to Rent

News : Natwest

Highlights

– Build-to-rent properties currently constitute less than 1% of the UK’s 5m private rental households

– Projections suggest the proportion of households renting privately will rise from 19% today to 25% by 2021

– Build-to-rent has been recognised and supported by the UK government as an important factor in diversifying and improving housing supply

The growing number of build-to-rent developments in the UK is fuelling interest that this fledgling sector is ready for take off.

Of the 5m private rented households in the UK, there were just 17,000 completed build-to-rent (BTR) homes as of 2017, and BTR units make up less than 1% of the private rented sector (PRS) housing stock.

However, the longer-term outlook paints a more promising picture. The BTR sector is currently worth £25bn, but this is expected to increase to £70bn by 2022, according to estimates by Knight Frank.

While PRS is a term that covers all privately owned rented properties, BTR refers to high-quality properties designed for renting, with on-site services often provided by a professional management company. Savills says BTR in the UK is just seven years old, and it took America 20 to 25 years to reach maturity in the sector.

Neil Young, chief executive of UK group Get Living, adds that as the industry matures, confidence from investors is increasing. The rise in the number of BTR homes is providing more data to analyse and expertise to benefit from.

“UK and local governments are actively supporting the sector,” says Young, “and, while there is still much to be done on the planning side, there is an overall embracing of what BTR can do to support housing delivery.”

When it comes to professionalising the sector, Dominic Martin, operations director at global management firm Atlas Residential, says: “There’s a huge opportunity for the sector to become more professional. The difficulty is that the existing UK management sector is siloed between ‘block managers’, ‘leasing agents’ and ‘property managers’, all with their own industry training and bodies, and one team will have no interest or understanding of what the other does.”

Professionalism is likely to be led by US operators and managers like Atlas and Greystar, which have more than 30 years’ experience and understand how buildings should be staffed to provide the service UK tenants now demand.

“Tech will play a part but knowing how to hire the right people, staff properties properly and train them is critical,” says Martin.

Not just for millennials

BTR is often seen as appealing to millennials, who appear to be more flexible in their living and working arrangements and are opting not to settle in one place too early, like their parents did.

As the sector grows, and as more operators eye up prospective sites outside London, the target audience for BTR is expanding beyond young urban professionals to pensioners.

“Senior living is entering the minds of some BTR players,” says Arthur McCalmont, senior director at CBRE Residential Capital Markets. “Firms like Quintain and Delancey are producing data to show there is demand for BTR homes from those in their sixties and seventies.

“There’s also a move to a more mid-market approach. We’ve had a lot of high-end apartments, with BTR developers focusing on the luxury market. But as BTR moves into regional cities, there’s an increasing acceptance that it can work in areas where rents are lower and that mid-market products will work as well as the luxury end.”

While BTR may be new to the UK, it’s making its mark. As the years go by and renting rather than owning becomes a more viable option for thousands of people, the sector will mature and more opportunities for retail investors to share in its success will appear.

A growing rental market

It’s projected that by 2021, 25% of UK households will be renting privately, up from 19% today. This projection suggests a continued shift towards renting and, therefore, ongoing demand for BTR accommodation.

Young says: “The sector will continue to lean on BTR operators, who are professional landlords that own all homes in a development and can leverage their experience, scale and provide a service-led rental offer to help meet this demand.”

The largest proportion of private renters is couples without children, followed by tenants living alone. Together, they make up 59% of the PRS, according to Knight Frank. Some 68% of renters expect to still be living in rented accommodation in three years, and affordability is the prime concern for prospective tenants.

Although only 12% of private renters are currently living in accommodation run by a corporate landlord, interest is growing in the services the BTR sector can provide. A 2017 survey by LSL Property Services revealed 74% of tenants showed an interest in some kind of communal facility or activity.

Knight Frank’s Multihousing 2017 survey revealed 26% of ‘iGens’ (urban graduates or first-jobbers under 25) would consider paying a rental premium for a technology lounge and 21% of 25 to 49 year olds living alone might pay extra for a 24-hour concierge. Priorities for young families under 35 included an on-site nursery, while en-suite bedrooms were an attractive option for parents over 35.

Long-term approach

While the sector is booming, there remain challenges. Traditionally, BTR is valued differently from build-to-sell (BTS), with BTR relying on long-term income from rents rather than a relatively quicker return from the sale of units. This often means BTR cannot compete on an equal footing with BTS for the speculative acquisition of land.

Both the government and the Greater London Authority (GLA) recognise the different economics between BTR and BTS, and have been supportive of considering planning measures to facilitate the emergence of BTR and improve standards for tenants.

The government plans to make it simpler for BTR developers to offer affordable rent in place of other types of affordable housing. It’s also seeking to ensure BTR projects offer three-year family-friendly tenancies, a move that will help stabilise the rental market.

Another boost to tenants came in November 2017, when a draft bill was introduced to Parliament to ban fees to letting agents in England. Standards should be further improved by a range of powers announced in December 2017 that will reinforce councils’ power to clamp down on rogue landlords.

Foreign or domestic investment?

BTR is expanding across England. At present the capital for the BTR boom is coming from domestic and international institutional capital, sovereign wealth, and fund of funds. Private equity is also playing a role, and UK institutional capital is entering the market. So what is the UK government doing to support the sector financially, as it has the BTS sector with schemes like help-to-buy?

The chancellor’s Autumn Budget on 22 November unveiled a £44bn housing package and a number of initiatives that will affect the BTR and PRS sectors. These include an SME house-building fund, £1.1bn to unlock strategic sites, £8bn of financial guarantees to support private house-building, a £2.7bn boost to the housing infrastructure fund, the creation of five new ‘garden towns’, and a review chaired by Oliver Letwin into the delay between planning permission being granted and homes being built.

Scotland has also launched the Rental Income Guarantee Scheme, to attract new institutional investment to Scotland by sharing a limited proportion of the letting risk with participating members.

“While we applaud the Scheme, our feeling is that if the fundamentals of a large-scale BTR scheme should be viable without additional support from the public sector,” Young argues. “There are other ways the sector needs support – the majority of this is in the purchase and planning stages.”

As for offering a potential opportunity for smaller investors, there are limited options for those with a few thousand pounds to spare.

CBRE’s McCalmont says that while players such as Hearthstone are offering retail investors a slice of the BTR action, such opportunities are few and far between.

“The industry is still in its infancy, but there are those with plans for the medium term to launch full BTR real estate investment trusts, but that is around three to five years off,” he adds. “As the market matures there will be investment opportunities for smaller investors, but it is limited at the moment.”

By David Parsley

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