Investment experts agree that despite political, regulatory, and economic headwinds the prospects for investment in Build to Rent (BTR) remain positive.
In an Investor Lender Forum webinar hosted by UKAA earlier this month and attended by a range of investors, operators, and developers of Build to Rent, a panel of agents and investment managers discussed a range of factors impacting BTR and concluded that the asset class remains an attractive investment.
Historical Economic Comparisons
The panel compared the current economic situation to previous serious recessions such as the global financial crash of 2008 and the recession of the late 1970s. The latter is most similar to today’s situation, with an oil crisis, strikes, and stagflation. The difference today is that there are far better financial controls and a less unionized workforce, although the twin risk of high-interest rates and high inflation can be a limiting factor to growth. The panel was optimistic that interest rates will ease back over the next two years, and any recession will be shallow.
Investment Prospects For BTR
The case for investment in BTR remains strong, driven by a continuing imbalance between the supply and demand for rental accommodation, the lack of affordability of homes to buy, the strong and consistent yields, and a growing cultural shift towards renting. Occupancy rates continue to be high, and with demand so great, rental rates have seen double-digit growth. This is not seen as sustainable, with operators realizing that rents should be optimal rather than maximized to retain affordability.
The sector is attracting new capital sources, particularly from North America, Europe, and South East Asia. There is a slowdown in the number of opportunistic funds as high-interest rates erode short-term viability. However, the prospects for long-term capital investment remain strong, with forward-funded deals still attractive as yields remain robust.
However, forward-funding deals are becoming tighter with the costs of labor being high and the impact of regulatory changes such as the Building Safety Act causing amendments to schemes, driving up costs and introducing delays.
Overall, the prospects for BTR investment are seen as very strong. The final quarter of 2022 was relatively subdued but still saw £1bn of capital deployed even amidst such economic turmoil. Q1/2 2023 is seeing steady activity, with transaction volumes expected to accelerate in Q3/4.
Growth In Joint Ventures
The panel sees a change in the way deals are being structured, with joint ventures becoming more common. JVs with developers share the risks of development, with elements such as overage clauses and profit sharing being attractive to both parties.
Rise In Single-Family Rental (SFR)
The fastest growing area of rental is in single-family homes, where the demand is growing whilst volume housebuilders are seeking routes to transact volume of new build stock as demand for new homes for sale reduces, as a result of high-interest rates and the ending of Help to Buy. The panel saw SFR as a growing opportunity, with long-term pension fund money being attracted by the affordability, access to scale, and size of the potential market.
There is a window of opportunity to work with housebuilders in the medium term – seen as a “marriage of convenience” – enabling the developer to secure a bulk exit. Panelists saw this as a two-year window.