Soaring inflation has led many funders to reconsider taking on development risk, as key construction materials have hit sky-high prices due to pandemic-induced supply chain shocks. 

Mary-Anne Bowring

Mary-Anne Bowring

However, for institutional investors wanting to access UK real estate living sectors, a lack of tradeable stabilised portfolios in sectors such as build-to-rent (BTR) and co-living is limiting investment opportunities, and so moving up the risk curve is a necessity.

Institutions that can find and build relationships with seasoned development partners, with proven track records of delivery will weather the inflationary storm and still make strong returns. That said, rising capital expenditure will put greater scrutiny on operational expenditure. This is especially true for long-term investors such as pension funds and insurers. They want to reduce their gross-to-net leakage to maximise the liability-matching income streams that BTR and other alternative residential assets provide. Higher development costs mean having the right operating strategy, and partnership is more crucial than ever.

Fundamentally, in residential for rent, managing operational risk is just as crucial as controlling development risk. Rising construction costs and delays mean the long-term performance of an asset is more important than ever to deliver the right returns. Tech and economies of scale are key to unlocking and adding value in the operational phase, which will drive a wave of innovation and consolidation in the living sectors.

Successful residential for rent operations, whether multi- and single-family BTR, co-living or student accommodation, require a lot of experience and expertise, as well as a detailed understanding of decades of legislation, regulation and technical nuances.

Those who take a forward-thinking approach will find it easier to sail through current conditions

Rent collection, maintenance and leasing are the three primary forces that drive the performance of any asset, and all can be streamlined by embracing technology focused on data analysis and workflow automation. That is why Ringley has adopted a digital-first approach and invested millions in creating a tech stack covering different stages of an asset’s journey.

They may seem mundane, but automating functions such as facilities management, health and safety compliance and on-site staff recruitment can drive efficiencies, with asset owners benefiting from the aggregation of marginal gains.

No one part of the asset lifecycle can be viewed in isolation. The most effective strategies require understanding from site selection all the way to project monitoring, planning, development, mobilisation, stabilisation and exit.

However, many institutional funders prefer to work with multiple development and operating partners, which allows them to achieve scale quicker.

But it won’t just be the development partners that will feel pressure from higher construction costs. Third-party operators will come under increasing pressure to demonstrate how they add value. Those who take a forward-thinking approach and have a whole-asset-lifecycle understanding will find it easier to sail through current market conditions.

Others will struggle, and may look to offload the first wave of underperforming assets. This will open up possibilities for M&A activity and repositioning plays, which will mark the next stage of maturity for the UK’s emerging living sectors.

Mary-Anne Bowring is group managing director at Ringley Group and chief executive of rental management software provider PlanetRent