Opportunity for Build to Rent

The UK’s fledgling build to rent market will have its first real acid test over the remainder 2020 and into 2021. For some time the proverbial bridesmaid of the residential real estate market, the industry was beginning to build a head of steam. In fact, growth had been so successful in the UK that governments and market participants from Australia and New Zealand viewed it as a potential blueprint for the development of the industry in their own domestic markets

Additionally, the recent 2% surcharge on international investors introduced in the government’s latest budget appeared to provide the breathing space the industry needed in order to be competitive with foreign capital. Accordingly, the industry was set to deliver the growth it had always promised. What a difference a couple of weeks makes…

Build to rent housing is a relatively new concept in the UK, Australia and New Zealand, but is well established in the US, where it's known as multi-family housing.

We are now likely to find ourselves, post a period of economic decline (who knows how long that will be), in a period which does not look too dissimilar to the period immediately after the Global Financial Crisis (GFC). However, one thing has changed; whilst, no doubt under pressure to deliver sales, developers face into these market conditions in far better shape financially than in other downturns.

Build to Rent – Market Opportunity

The question will be for the build to rent industry how will it respond? In previous periods of property market uncertainty, the build to rent industry has failed to seize the opportunity whereas underwriters and international investors have held their nerve and moved into the demand vacuum. The reward for this property market faith has been significant capital growth. In fact, rewards have been so good that the government has stepped in now on several occasions to tax this group of investors.

It is difficult to imagine, as some have suggested, that the market will simply be put into ‘deep freeze’ and post some type of conclusion to the coronavirus (or just social distancing measures) we will simply carry on from where we left off. The reality is that a significant amount of economic damage has already taken place; the situation domestically in most markets will have changed. Buyer confidence will take a hit as people seek to recover financially from what will be an extremely testing period for most. Unsurprisingly, we are already starting to see the impact in the UK market; Zoopla has seen a 40% decline in domestic demand in its UK Cities’ Index just last week.

Anecdotally, I am aware of several build to rent transactions (and in fact I am in involved in one) where investors have put their purchase ‘on hold’ whilst they assess the economic conditions. The one market which has not stopped is international investors; I am aware of several new deals taking place even last week.

Which leads me to my central point, the build to rent industry will again find itself in a faceoff with the international buy to let investment market; whether or not it can hold its nerve will no doubt be pivotal to the level of traction and influence it has over the coming years. As Asian economies look set to recover earlier from the impact of coronavirus, there is no doubt that Asian capital will seek opportunities in western economies and the UK residential market will be no exception.

With the backdrop of lower interest rates and a strong currency position, international buy to let investors are likely to see the UK market once again as an opportunity and will no doubt be willing to trade off a lower initial yield against the future upside of capital appreciation and currency appreciation. For the build to rent industry this long-term capital will need to take a long-term view on returns and long-term rental growth, or alternatively reposition its model to take on planning and development risk. Otherwise it may again find the gap between what it is willing to pay and what the market will bear will simply be too vast – and once again it will play second fiddle to other less risk averse investors.

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