Build to rent offers huge possibilities for developers and investors, particularly in the long term. In fact, we predict that by 2020, continued growth in this sector will see it much more established as an institutional grade investment in residential property.
But this new investment class isn’t like anything that’s gone before and as such, it’s crucial for anyone entering this expanding market to take expert advice. Because the scale and lot size involved in build to rent are so different from traditional PRS stock, it will need to be appraised, valued, managed, bought and sold very differently.
The rise of Build to Rent
Traditionally, the great bulk of rental homes in the UK have been provided by buy-to-let landlords. Up until recently, only a comparatively small number of residential property companies invested in small-scale blocks held for rent.
But now, large-scale, purpose-built blocks are being constructed and retained for rent. It’s effectively a new sector of residential property and it’s attracting the attention of new investors, mainly financial institutions like M&G, Legal & General, LaSalle and Aberdeen Asset Management.
The right investment class at the right time?
The UK housing shortage combined with the growing number of people who want or need to rent has led to a vast potential for expansion in the rented sector.
Around 8.5 million people now rent privately in England, with the sector accounting for 19% of households in 2013-2014.
And a smaller proportion of households are expected to be owner-occupiers. The latest Census shows that the proportion of homes in England now owned with a mortgage has dropped by 15% while private rental homes have rocketed by 69% over the ten years to 2014.
Other factors are playing a part in making build to rent so attractive. Commercial property leases have shortened, so the risk/return profile when compared with residential assets is more equal. There’s also government support for the new sector through the Montague Review, Stamp Duty Disaggregation and changes to planning rules.
Overcoming the barriers
Investors see newly constructed, purpose-built blocks as overcoming previous barriers to investment in the PRS market, addressing issues such as:
- Reputation
- Quality of management
- Infrastructure
- The return profile (primarily income) when compared to other investments
Build to rent is also a good entry point to the housing market for investors at scale. Most institutions need to see a pipeline of assets culminating in a Fund size of over £250m. Because of scalability, fewer build to rent assets of 100+ units are needed to reach critical mass.
Where are the opportunities?
Because of land prices, demographics and location, the picture isn’t the same all over the UK: capital requirements, investment criteria and opportunities for rental growth will be specific to each opportunity – this isn’t a one-size-fits-all asset.
Outside London and the South East, for example, build to rent is often more viable in regional city centres as the market for flats built for sale is weaker.
The regions offer greater land opportunities than London and the South East, but there may also be risks. And while the current focus in the regions is on ‘prime’ sites, we’re starting to see funds consider less well-developed locations.
In outer London, net initial yields of around 4% feel intuitively to be a reasonable yardstick for a large-scale build to rent development, but funds could be prepared to pay more for a pipeline of supply. Income return requirements outside of London are higher though.
In terms of income returns, these are difficult to establish in today’s market, with institutions using a variety of funding models.
Overall, this is a market that’s developing month-by-month. At Allsop, we can help you negotiate it by covering everything from appraising the sector to advising on design.
