In a country where 20 per cent of households live in private rented accommodation, the British Property Federation (BPF) has reported that only 62,000 dedicated rental properties have been built, with a further 39,500 dwellings under construction (BPF, Q2 2021).
The infancy of Build to Rent in the UK is tremendously exciting. Most Build to Rent investors are not developers, in spite of the eye watering levels of capital being poured into this sector. On the flip side, the operational intensity of these assets is definitely under estimated, which is fundamental to achieving the returns that are underwritten on day one.
The challenge for investors is to invest in building critical mass with the right product; how soon can they get to 10,000 homes under management? While there is capital waiting to be allocated, there is a dearth of quality product to invest it in.
If Build to Rent is to grow significantly in the next five years, then either investors will proceed to take control and develop purpose-built assets themselves, or developers must recognise the scale of the opportunity and rise to the occasion of designing assets specifically for rent.
The UK is a blue ocean opportunity
Investors are turning their attention to markets where demand is growing and the alternatives sector was picking up even before the start of the pandemic, due to its low vacancy rates and good rental growth.
The consumer, in this case renters, have historically been underserved in the housing business. The lockdowns turned working professionals into keyboard warriors dominating the world through Zoom and Teams from their kitchen counters. The trend towards remote working, home offices and access to green space has also meant more and more people chose to live away from crowded towns and city centres to commuter-belt locations.
Renters across the UK, not just in the populous centres of the likes of London, Birmingham and Manchester, want access to high-quality rental properties that they would love to call home. The rental experience and sense of community in a Build to Rent development is the ultimate customer service offering. That’s the opportunity set and ultimately it’s up to the developer and investor to work through the challenges and deliver to the UK residents.
The positive demand for the sector is far ahead of the product available. The challenge is on the supply side which is deficient in purpose-built, fully amenitised, professionally managed assets. Some investors have obviously moved up the risk curve to forward fund or forward commit to secure the product, but there are still real questions about how well some of that product is ultimately going to perform.
You only have to look at the Build to Rent figures to see it’s a growing market, with huge opportunities for developers and housebuilders. BPF data from Q2 2021 shows there are almost 40,000 homes under construction and around 94,000 homes in planning in the UK, showcasing the pace of growth in the market and its potential.
Looking ahead
We have noticed a distinct shift in the past 18 months when talking with developers. The sentiment has shifted from something that has piqued their interest, to a sector they see as a genuine way to de-risk their development sites and create new streams of revenue. There are opportunities for developers looking to boost their cash-flow and add a new permanent stream of revenue to support their traditional sales model, if they’re prepared to deliver a good quality purpose-built product.
The key will be to secure the right relationships between investors and developers that truly understand the Build to Rent asset class and can create a product to meet consumers’ demands.
About the author:
Erica D’Souza is a senior advisor in the Built to Rent team at Colliers, she has six years’ experience in advising on UK prime residential investment. Since joining Colliers in 2018 she has been advising both investors and developers on the emerging Build to Rent Market across the UK.
To contact Erica, email [email protected]