Development is one of the trickiest parts of being a property lender. So much can go wrong: planning wrinkles, problems in the ground before a structure starts rising, construction delays and disputes, and finally the risk of leasing a speculative project.
But taking all this into account, as a lender, we’re still a big fan of build-to-rent (BTR) development. So many of the fundamental metrics – even post-Brexit, during Covid and a global recession – will be compelling for years to come.
It helps that development lending is in Investec’s DNA. We have lived with the highs (and some lows) over the past 30 years, and relish rolling up our sleeves to work with a development team to create a financing package that works for everyone involved.
Half of our lending book is now residential, much of it devoted to student accommodation. The BTR prospect is equally attractive.
Affordability is a huge issue for young people who prefer to rent in a great location than buy in an area where they don’t want to live. On top of this, the idea of paying for a home over a 25-year mortgage is counter-intuitive to, say, a tech specialist who wants the flexibility to move to New York in 2025.
Offer these people the chance to rent in a traditional home in multiple occupation and they run a mile. Offer them a BTR apartment with services like a concierge and a gym all under one bill and they snap it up. It’s an obvious lifestyle choice. You get more than just a home, you also get access to a community.
With BTR, you get more than just a home, you also get access to a community
With renting the norm in much of continental Europe and the US, demand for a professional BTR sector would grow even if driven solely by people arriving in the UK. But the growth in demand in Britain goes far deeper. Big private equity fund managers that manage assets worth billions see the supply and demand imbalance as highly attractive. Investors have the benefit of learning from the success of overseas BTR-style assets and the opportunity to take advantage of the nascent nature of the UK BTR market.
Prime London BTR assets are now trading at yields below 4%, with prime regional assets only trading at 50 basis points higher.
Also, and most notably, in tough times, BTR is resilient, with great defensive characteristics. Rent collections since March 2020 have been in excess of 90%, with low churn and vacancy rates.
Investec likes financing BTR in London and the South East, but also looks at strong regional locations with compelling fundamentals. Big-ticket deals are also appealing, and we are well placed to structure and manage lending clubs. A great example was our partnership with Bank of Ireland, where we arranged an £80m loan to a joint venture between Henderson Park and Greystar for a 257-unit scheme in Walthamstow, London.
We’re comfortable underwriting these deals as we understand the development process and the operational model. Our analysis of the rental market in the locations where we lend shows that rental income will remain robust. After all, the rent cheque is the first outgoing for every renter every month, whereas for some commercial tenants, it’s become another issue among their sea of problems.
With multi-family assets trading at far tighter yields than commercial real estate in mature markets, BTR is, to a banker, very appealing indeed.
Josh Weinstein is a member of Investec’s real estate lending team