Prime Build to Rent (BTR) yields, circa 3.50% in London and 4.00% in the regions, have stabilised in recent years, following a period of compression since the sector’s inception in 2012.
With yields as low as they are, it may sound bullish to suggest they could compress any further, especially while the UK is still in lockdown. Still, there have been some interesting trends indicating that investor demand for BTR stock is mounting.
Fundamentally, UK BTR has been fortunate in the sense that the pandemic’s headwinds have largely failed to destabilise it. Colliers are aware of an increasing number of requests from international funds for advice on how to enter the UK market, and with many trying to find where to place capital, due to other sectors softening, the sector provides an attractive opportunity to invest at scale compared to traditional residential investment.
BTR is considered to be counter-cyclical and Gatehouse Bank’s results last summer on their suburban portfolio has demonstrably proven that it can provide strong returns in downturns. It’s no surprise Goldman Sachs moved in to buy the bank’s entire suburban housing portfolio in January.
Affordability challenges in the sales market also make this sector more attractive to investors. Last year marked the first time in recent recessionary history that London house prices grew. While banks are now offering more favourable mortgage terms this will not offset the pace of current house price growth when there is slower earnings growth. Couple this with changing policies such as the modification of Help to Buy and the eventual end of the stamp duty holiday, and the barriers to buying a house remain significant.
On top of this, the supply of BTR stock in UK housing remains extremely low. There is a huge dearth of three and four bedroom BTR flats (an opportunity given household sizes are growing as a result of the pandemic) and suburban institutional rental houses.
Additionally, a number of investors have spoken about delivering more affordable, less premium, private BTR units. Targeting a lower rental income will mean the only way to remain competitive in the purchasing of land will be to underwrite a sharper yield.
Overall, with BTR investment volumes reaching a record of around £3.5bn in 2020 (roughly a 30% increase on 2019), and with more than £600m of investment in January alone, this looks set to only increase for the year ahead.
That said, there are a number of counteracting factors worthy of consideration.
There are concerns in some financial circles over the return of inflation considering the amount of pent-up cash (quantitative easing and furlough) circulating in the economy, combined with rising food prices because of Brexit.
If inflation was to increase above the two per cent target, the Monetary Policy Committee would likely increase interest rates in order to reduce the growth of aggregate demand and inflation, which would in turn raise yields.
Further, access to the BTR market is still largely hinged upon going through the development and forward purchase process, which carries increased risk while the construction process is susceptible to delays.
Investors may also be deterred by negative rental growth, which has created a “halo” effect in UK city centres as people relocate to the outskirts of big cities.
And in what is particularly alarming, the pandemic, combined with Brexit, has also been the catalyst for some significant demographic shifts. Approximately 1.3million people born abroad left the UK between Q3 of 2019 and Q3 2020 - as many as 700,000 of these are estimated to have left London. This is the biggest drop in the UK’s population since World War II, a worrying sign for occupational demand. It will be interesting to see if this trend is reversed as the UK opens its doors to the 2.9million Hong Kong residents through a new visa scheme.
Overall, yield movement will be driven by investor demand, and such will be linked to how the pandemic continues to unfold, which remains uncertain. New strains of COVID-19, vaccine deployment and fiscal responses from the Treasury are all going to play their part. Still, if the UK is to emerge in the coming months with a healthy-ish looking economy, then BTR yields could sharpen further.
About the Author
Mike Butler works in the Build to Rent team, having joined the company as a graduate in 2016 and qualifying in 2018.
His main role is to source, appraise and broker forward funding and forward commitment Build to Rent/PRS opportunities across the UK.