'Explosive' growth of single-family housing shows maturity of UK BTR


27/01/2022
by: Mary-Anne Bowring

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Goldman Sachs made the headlines after announcing a partnership with Urban & Civic to deliver hundreds of rental homes across the UK.

The bank is no stranger to build to rent (BTR), having made its debut in the sector a few years back with a £118 million loan to finance the construction of Apache Capital and Moda's The Mercian skyscraper in Birmingham. Yet what made the deal with Urban & Civic stand out is that these homes will be houses, not flats, for rent. BTR has long been, somewhat unfairly, characterised as providing expensive flats for urban young professionals.

BTR schemes for city-centre apartments

While the majority of BTR schemes are city-centre apartments, many operators have found they have intergenerational appeal, with young families and downsizes taking up residence alongside fresh graduates and globetrotting digital nomads. There is now a growing weight of capital looking to fund houses for rent too. Known as single-family housing in US parlance, this small sub-sector of the rental market is rapidly growing.

Besides Goldman Sachs, heavyweights such as private equity giant Blackstone and FTSE 100 pension and insurance provider Legal & General are entering the single-family space. The reasons are not dissimilar to why many investors are backing BTR apartment schemes, or multifamily housing as they are called in the US. Residential for rent in all its forms offers investors access to income-producing assets with defensive, counter-cyclical qualities.

For institutional investors such as pension funds and insurers, rental housing is an attractive alternative to traditional institutional investments like sovereign bonds, which have been trading at low or even negative yields. Residential for rent is also looking increasingly secure compared to mainstream real estate asset classes such as offices and retail. Covid-19 forced a mass experiment in remote working and the future of large city-centre office blocks, previously considered one of the safest bets you could make in property, is far from certain.

Retail was in trouble before the pandemic, with consumers increasingly shopping online rather than in-store and this is a trend that multiple lockdowns will only have compounded. In a higher inflationary environment, the ability to reset residential rents more regularly than in commercial real estate is especially attractive as lease lengths are far shorter. Yet SFH isn't just seeing growing investor interest because of the disruption facing other asset classes. There are several key positive growth drivers. First is rising demand. Families are one of the fastest-growing renter demographics and while Covid has not killed off urban living, as some predicted, there is no doubt the pandemic has driven many to find somewhere bigger, greener, and quieter to live.

Second is the availability of land. There is less demand pressure on rural and suburban sites compared to city-centre sites and the supply of larger plot sizes enables economies of scales to be achieved easily. Third is the potential for better-performing assets. Data from the US, where SFH is more established, suggests single-family rental communities have higher tenant retention rates and lower OPEX rates than multifamily apartment complexes. So far SFH is following the same trajectory as its urban cousin, with most initial schemes being delivered through forward funding deals or investors partnering with house builders. Only a few, like Apache Capital with its Present Made platform, are creating a purpose-built and designed product.

BTR homes in planning

The latest BPF and Savills research shows there are 205,525 BTR homes in planning, under construction and completed. Some 15,771 suburban family homes made up 8% of the BTR total, with the bulk being completed stock (40%), followed by homes in planning (33%) and those under construction (26%). This increased diversity of offering is a sign of BTR's growing maturity as an asset class. Purpose-built and designed or not, we should all welcome investment that increases the supply of family homes for rent.

The lack of high-quality rental housing in the UK is well documented, as is the poor-quality service and accommodation many renters receive from buy to let landlords. Renters of all ages would benefit from a landlord that provides a newly built, professionally managed property be that a house or a flat. A home is a home after all.

Mary-Anne Bowring: 'Explosive' growth of single-family housing shows maturity of UK BTR

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