Development is one of the trickiest parts of being a property lender. So much can go wrong: planning wrinkles, problems in the ground before a structure starts rising, construction delays and disputes, and finally the risk of leasing a speculative project.
Even after taking all this into account, as a lender we’re still a big fan of build-to-rent (BTR) development. So many of the fundamental metrics – even post-Brexit, during COVID and a global recession – will be compelling for years to come.
It helps that at Investec, development lending is in our DNA. We’ve lived with the highs (and some lows) over the last 30 years, and relish rolling up our sleeves to work with a development team to create a financing package that works for everyone involved.
Half of our lending book is now residential, with much of that devoted to student accommodation. The BTR prospect is equally as attractive.
Affordability is a huge issue for young people who would prefer to rent in a great location than buy in an area they don’t want to live. On top of this, the prospect of paying for a home over a 25-year mortgage is counter-intuitive to, say, a tech specialist who wants the flexibility to move to New York in 2025.
Offer these people the chance to rent in a traditional home in multiple occupation and they will run a mile. Offer them a BTR apartment with services like a concierge and a gym paid for within one bill and they will snap it up. It’s an obvious lifestyle choice. You get more than just a home, you also get access to a community.
The world is becoming more inter-connected, and with renting being the norm in much of continental Europe and the United States, demand for a professional BTR sector would grow even if driven solely by people arriving in the UK.
However the growth in demand in Britain goes much further than that. Large private equity fund managers with billions of assets under management see the supply and demand imbalance as highly attractive as well. Real estate investors have the benefit of learning from the success of BTR style assets in foreign jurisdictions and the opportunity to take advantage of the nascent nature of the UK BTR market.
Prime London BTR assets are now trading at yields below 4%, with prime regional assets only trading at 50 basis points higher.
Additionally and most notably, in tough times, build to rent is proving resilient, with great defensive characteristics. Rental collections since March 2020 have been in excess of 90%. Evidence has also shown residential rental streams to be particularly sticky, with low churn rates and equally low vacancy rates.
At Investec we like financing BTR in London and the south-east, but will also look at strong regional locations with compelling fundamentals. Large ticket deals are also appealing, and we are well placed to structure and manage lending clubs.
A great example was our partnership with Bank of Ireland, where we arranged an £80 million loan to a joint venture between Henderson Park and Greystar for a 257-unit scheme in Walthamstow, London.
We’re comfortable underwriting these deals as we understand both the development process and the operational model. Our analysis of the rental market in the locations where we lend shows that rental income will remain robust.
After all, the rent cheque is the first outgoing for every renter every month, whereas for some commercial tenants today it’s become another issue among their sea of problems.
A lot of knowledge can be gleaned from international markets – and with multi-family assets trading at far tighter yields than commercial real estate in mature markets, BTR is, to a banker, very appealing indeed.
Please feel free to reach out to Joshua via email