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Slow-burner: the UK’s BTR story so far

 

The UK’s ‘Build to Rent’ market: a slow but steady emergence:

Build to Rent (BTR). The Private Rental Sector (PRS). Pick your acronym, in the UK’s current property market, it’s an inescapably hot topic. While it is frequently reported to be gaining momentum in terms of institutional appetite, the latest figures produced by the British Property Federation indicate that – since the sector’s highly-anticipated arrival in the UK, in 2011 – only 30,000 BTR units have been completed, with a further 74,000 in various stages of planning.

Investment into the UK BTR sector rose sharply in 2015, dipped in 2016 and has steadily risen since: from 2017 onwards, this figure has consistently surpassed 2015 investment figures – this despite the continuous state of political uncertainty in the UK, since Cameron first called for his infamous referendum. Despite this clear statement of institutional optimism, the value of BTR stock traded in FY2018/2019 was largely unaltered from the 2012 figure, with the promise of major investment looming large, but ever on the horizon.

 

Standing Assets, Forward Funding or Portfolio Trading?

While the overall value of investment may have plateaued, it is in the means by which institutional funding is entering the market that we have witnessed the greatest paradigm shift. Roll the clock back to 2014, and 87% of deals by GDV were for ‘standing,’ (‘stabilised, income-producing’) assets. Contrast that with a figure of 27% in 2018, finance for BTR is today largely predicated on the forward-funding of schemes.

The advantages for both parties in such an arrangement are self-evident: a bespoke product, offering a higher yield for the investor; greater exit certainty for the developer. Established developers, possessing the nous (and of course the financial incentive) to guarantee profitability will procure and deliver the end asset, with the institutional buyer of the end asset bearing the risk of funding the construction phases.

A late flurry of Canadian Pension Fund investment activity towards the tail end of FY2018/2019 saw the total North American investment in UK BTR rise to £4.2billion – accounting for nearly half of the capital committed to the sector.

An overwhelming portion of this figure – around 92% – has entered the sector in the form of either forward-funding or M&A. Institutional acquisition of standing assets over the course of FY2018/2019 represented a mere 1.5% of the wider market deal type, but some educated voices within the market seem to suggest that the winds of change are upon us.

So far this year, both Cortland and LaSalle Investment Management have demonstrated clear interest in Dandara’s £400million – 2,000 unit – BTR portfolio, much of which is due for occupation later this year. Cortland ultimately determined instead to purchase market-leading LIV Group – comprising both LIV Consult, and LIV’s dedicated residential block management business – for an undisclosed fee. CBRE were not far behind with the £267million purchase of Telford Homes, under their ‘Trammell Crow’ guise.

So do such transactions spell out the decline of the dominance of forward-funding arrangements within the sector? The best-placed sources within the industry suggest that we shouldn’t infer too much from these recent transactions. Simply put, the dearth of ‘institutional calibre’ product in the present market means that for now forward-funding is likely to retain its primacy over M&A/portfolio transfers.

 

The future for UK BTR?

Looking ahead, there appears to be continued cause for optimism within the sector. Reports from the tail-end of FY2018/2019 indicate that some £16billion of North American Equity is targeting the UK BTR market. There is a new acknowledgement within the sector that scale is key to the viability of the BTR model, particularly on an operational level. With this, the average BTR scheme is getting bigger: contrast the average size of completed schemes – 133 units – to that of those currently under construction – 240 units.

‘Consolidation’ appears to be the buzzword in terms of where the sector is headed. There is optimism that the proliferation of stock and a tried-and-tested, viable product will firm-up institutional interest within the sector. Market-leaders such as Quintain have publicly espoused the notion of acquiring other BTR companies; the likelihood is that the next four/five years should bear witness to widespread mergers and acquisitions between BTR owner-operators, followed by IPOs resulting in specialists with portfolios rivalling the American multi-family investors in scale.

Regardless of which avenue of market entry institutional investors choose to pursue, the future of BTR in the UK looks promising and – like it or not – the role of the financial institution in combatting the UK housing crisis is very much here to stay.

 

Credit where it’s due to the authors of the following articles:

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