HOW IS THE MARKET WITHSTANDING COVID?
Prior to the Covid pandemic, the Build to Rent (BTR) sector had a strong start to Q1 2020 with over £1bn of capital committed. The economic backdrop was positive due to returning levels of confidence to the market after Brexit and the general election. Although the full impact of the pandemic is still unfolding, particularly with the threat of a second wave and increasing amounts of local lockdown measures, the BTR sector has demonstrated that it is one of the more resilient asset classes. Irrespective of the pandemic, life still goes on, the population is still growing, there is still a chronic housing shortage and people need opportunities to rent. Despite the political rhetoric, the current economic climate will likely still impact upon first-time buyers, delaying their decision to commit to home ownership until the wider economy recovers. We may also see stricter lending criteria alongside the continuing issue of affordability, there will be a continued demand for rental property.
During lockdown, investors and their operators have necessarily have been focused on managing customer welfare and wellbeing, particularly where individual tenants were experiencing hardship, as well as finding smart ways of maintaining occupancy levels where tenancy viewings have proved difficult. This has resulted in a rapid transition to digital systems and virtual tools that have enabled greater engagement between residents and operations teams. This has allowed management teams to communicate any changes they may be making and why, as well as keeping tenants up-to-date on measures to keep them safe. Moreover, where amenity spaces have been shut down, they have been replaced with a virtual suite of options including fitness and wellbeing events, cooking challenges and book clubs. By being innovative in providing a supportive communal environment, BTR landlords will ensure that residents want to stay for longer and are prepared to pay premium rents, which in turn will drive return on investment.
BTR property also appeals to those wanting to live in a particular location and have a certain lifestyle that is not restricted by the costs of owning and managing property. Tenants of BTR property are generally attracted to these developments due to high quality architectural design, choice of space and design within the apartments and a range of price points. Residents are willing to pay for the convenience of having operational teams, often on-site, that provide a service which deals with property management and issues of health and safety. Whilst occupancy levels may have been affected due to lockdown coinciding with the Summer season, institutional landlords have been reporting relatively healthy rent collection levels for their BTR assets through 2020, particularly when compared with other asset classes.
THE SLEEPING GIANT HAS AWOKEN
Today, one in five households in the UK rent privately and with many looking for the flexibility that renting can afford, BTR is an increasingly popular option. The UK average age for first time buyers is 34.5 years (37 in London) and there are few signs that this upward trend will reverse any time soon. Quality PRS housing that meets the dynamic needs is in high demand but short supply.
BTR had, for a long time, been the sleeping giant of the residential asset classes in the UK. However this is fast-changing. Knight Frank have estimated that the current volume of capital committed to the market for professionally managed rental accommodation in the UK to date is £41billion, as of October. Globally, BTR is a c. £500billion industry, and whilst the UK was late to the party, it has gone from zero to occupying an estimated 8% of this global market in under ten years.
It has been estimated that by the end of 2020 there will have been £4bn worth of transactions in the UK's BTR sector, though as things stand, there are nearly double the number of BTR homes in the pipeline than are currently complete. London accounts for about 40% of the BTR that are currently complete or under construction, which is in line with BTR investment volumes over the past few years. Key regional cities make up the majority of the rest of the BTR development stock, with Birmingham, Liverpool, Leeds, Manchester and Salford accounting for approximately 35%. There is also increasing demand for BTR in smaller towns and cities, which may be classed as commuter towns with good transport links to major cities.
There is much to be hopeful about within the BTR market, being widely considered one of the more stable investment options available in the current economic climate. In June, the Royal Institution of Chartered Surveyors (RICS) recommended that material uncertainty clauses be removed from UK Build-to-Rent, making it was one of the first asset classes to have these measures relaxed. This demonstrated that there was sufficient transactional evidence to provide certainty and in turn should have improved confidence amongst investors.
FUTURE PROOFING BUILD TO RENT
BTR is increasingly becoming a popular choice for pension funds and other long term investors; the asset allows them to invest their capital in localised housing supplies and, provided that occupancy levels and operational costs can be well managed by a reputable operator, the asset can provide a stable income over the long-term. Developers are looking to build BTR property that is viable for at least 30+ years and so investors can be assured that these assets will be proactively managed so that the quality of property remains high for the long term. This in turn drives both positive social impacts for local communities (with tenants looking to stay in their homes for longer, without the fear of eviction if a buy-to-let landlord decides to sell), as well as creating a desire to build property that is sustainable.
Housing in general has a large part to play in driving decarbonisation. There is an expectation that environmental, social and corporate governance-specific investment vehicles will increase and therefore BTR developers and operators need to be proactive in building property that is future-proofed from a sustainability standpoint. For example, this can be done by ensuring that new schemes move away from gas heating towards geo-thermal systems and solar panels, towards electricity and the use of heat pumps instead of conventional boilers. There is also a role to play for modular construction in BTR developments, which can be more efficient and generate less waste in the construction process. By delivering sustainable BTR property, this will marry responsible investment with long-term returns that will ultimately benefit society by switching towards environmentally friendly solutions.
Alongside building sustainable residential property, BTR operators also are in the unique position that they can have a role to play in encouraging their residents to move towards becoming net carbon zero. They have the ability to shape and alter long-term behaviours by having amenities and technology that enable them to transition to more sustainable lifestyles.
By utilising sustainable building materials, as well as installing innovative smart building technology, BTR developers will develop better and safer places to live. They will also ensure that they have a portfolio that investors will be confident in investing in for the long term.
Addleshaw Goddard is at the forefront of the finance industry's drive towards sustainability, supporting clients to find imaginative solutions on sustainability-related business challenges and areas of advancement. For the latest information please refer to: https://www.addleshawgoddard.com/en/sustainability-climate-change
Partner, Real Estate Finance