Attendees at Property Week’s inaugural BTR conference in October discuss the opportunities and future for the sector.
What are the opportunities in the BTR sector?
Adina David, executive director, MGT Investment management: “It’s difficult to forecast exactly where we’re headed, but if we look at the wider build to rent [BTR] sector, including other housing types - not just multi-family, but also apartment blocks for rent, single-family homes, co-living communities and later living communities - you are starting to see pockets of opportunity.
”At MGT, we are in quite hot pursuit of some single-family opportunities as well as looking at development in the co-living sector - specifically, retrofitting existing office buildings. Retrofitting can be quite a green way to deliver housing and we’re looking at converting them into co-living use. We see quite a few interesting segments of the wider BTR sector that could be great to look at in the context of higher interest rates, and in seeking out a slighlty higher initial yield on our investments.
“If you are an investor, you should consider BTR as a way to diversify your portfolio. There’s very strong fundamentals in the sector. Really good strong demand and rental growth has really played out in the past year, so we’re feeling very positive on the sector as a whole.”
Jeremy Castle, planning and development adviser, Deloitte Real Estate: “Historically, we’ve been a nation that has wanted to own its own home, but clearly in changing economic times, people have different aspirations and a different ability to buy homes, so the rental market is inevitably increasing. What BTR gives is a properly managed and designed product people want to live in.”
Iain Murray, director of BTR consultancy, Europe, Cortland Consult: “We’re building a sector that’s offering something unique to renters, who are used to ‘mom and pop’ landlords or absent landlords, and agents who have to make several phone calls before they can fix something. [We’re turning it] into a professionally managed sector that really delivers customer service as a part of the core offering.”
What are the challenges for the BTR sector?
Andrew Screen, head of residential capital markets, BNP Parabis Real Estate: “My message would be that financial viability is difficult on BTR because of the economic climate, increase in construction costs and interest rate rises, which place pressure on developers to be able to deliver a financially viable scheme that is of interest to the investor. So we have this difference between the cost on one side and investor returns on the other.
“While investors are interested in investing in the sector, it’s difficult to get returns that they had two years ago. What’s important is that each party understands the difficulty of the other, so they can work together to deliver a scheme. So developers looking at restructuring some of their cash flows or deferring some of their profits and investors can’t expect the same returns they were getting two years ago. There needs to be a little bit of give and take from each of the bodies.”
Jason Dunlop, tax director, Everlyn Partners: “There is a lot of opportunity in the BTR Market. The challenge for the UK has been the embedded home ownership model that has been prominent. It’s taken a long time for not just the sector professionals to understand how to market those kinds of properties, but also to educate the public and the people who are going to occupy them. The US has definitely been a forerunner in this and we’re learning a lot from that market, but the UK market is a bit different.”
Kirpal Rehinisi, associate director, BTR, Touchstone Residential Property Management: “The biggest challenge is probably affordability for residents, but I don’t just think that is juts a BTR issue; it’s a global housing issue and hopefully BTR can go some way to solving that. We’re working with a local authority on their BTR in scheme and on things we’re doing is offering discounted market rents as part of the offer to help with that affordability issue.”
Castle: “The planning process is by its nature time consuming, because a lot of information needs to be distilled by local authorities and communities who have an interest in in development in their area. There are various reasons why the process is slow, one of which is the lack of resources and pressure planning officers are under to determine enormous workloads. Another issue we’ve been discussing today relates to the need for two staircases [in new BTR developments], with new regulations meaning planning officers will need to absorb more information, and knowledge, and therefore, there’s a risk that the planning system will take a bit longer.”
Murray: “At the moment, the gap between bonds and returns for BTR yields is too small, so you’re not likely to see people flipping from what is the short-term or medium -term bond market into the capital markets of BTR. However, there are signs that that is gap is going to open up again, and if it does, then BTR’s attractiveness could return. The biggest challenge BTR’s currently facing is really viability. Until the capital markets free up a bit, we’re probably all stuck in a little bit of a death spiral between construction cost inflation and a lack of liquid capital to invest in the market.
“As a business, we’re still seeing capital being deployed; clients of ours have just recently received £100m in funding, so it’s not as if nothing is there. There was nearly a billion invested in [BTR] in Q2 of this year. Everybody is really hoping that the market starts to return in the next couple of quarters.”
What do you think the future will bring for the BTR sector?
Debra Yudolph, founder and CEO, SAY Property Consulting: “I see March next year as probably being a bit of a turning point for the sector. Hopefully there will be more stability and interest rates will have stabilised. We’re not going to go back to where we were. In the end, people will find a way of getting on with it, because that’s what happens, so I think we’ll see more activity going into next year. Deals are still happening; there is still a lot of activity, but clearly, it’s not at the scale it was post-Covid before interest rates went up.”
Michael Herrington, director, residential management, Related Argent: “As operators, we need to focus on future regulations. It’s not a question of if, but when rent regulations are coming, and we as leaders and participants in the BTR industry need to be shaping that conversation with those who are going to be making decisions [on regulation]. Because if it goes the way I’ve read it, then we’re looking at a massive capital market freeze for probably six to eight months while institutional investors figure out what the heck’s going on.”
Castle: “Certainly in London, the BTR sector is going to continue to grow. London is in need of many more homes to meet the targets the London Plan sets, and a good proportion of those should be in BTR. I know from talking to developers, investors and clients that the sector is struggling with viability, and the wider residential sector is facing challenges with increasing costs and potentially reducing values. It is a very ambitious sector, and I can see that it will continue to grow and develop, with strong organisations involved in delivering BTR across London.”
Oliver Pearman, producer, Lockton: “The general consensus I’m getting is that we’re still in a bit of a rough patch with development viability, and interest rates still high, so investors are fairly scaremongerish about getting into these developments. But on the flip side we’re looking for a lot more positive Q1/Q2 next year, so hopefully things can really pick up and given the shortages in the BTR space ,the sector can really pick up and flourish for many years to come.”
Murray: “After [former prime minister] Liz Trust and [former chancellor] Kwasi Kwarteng [created what] some people call ’the Kwar-crash’, it seriously dented the economy; fundamental strains were there already, but they certainly accelerated it. The past year has been slower than previous years in terms of BTR growth and really that’s been a result of capital being a little bit stayed until interest rates stabilise.
“We are seeing interest rates and inflation come down again, so stability is going to return to the BTR sector. We can hope that coming into next year, we’ll probably see a resurgence. So I’m advising clients who have sites to continue with their planning so we can achieve planning consents at the same time as the market starts to return and, therefore, capital will want to invest in those projects. Some clients who have that liquid capital to fund a planning application are continuing to do. That’s where we are hanging our hat; as a business, we continue to service those type of clients, and when the market returns, they will have a product the market will invest in.
Rehinsi: “What we’re likely to see now, and what I was hearing about at the conference today, is perhaps a diversification of BTR product, whether that be into either full-on luxury schemes with swimming pools and gyms, or something a little bit more, dare I say, frugal, which is perhaps aimed more at the affordability end of market.
“Crystal balling 12 to 18 months in to the future, I’m not very optimistic for the buy to let landlord, but I’m incredibly optimistic for BTR. I can only see it growing and diversifying. I can see it supporting a number of different tenants, from those who are after an affordable product, to those who may be able to stretch a bit further. I can see it diversifying further into co- living as well. So there is there is an awful lot to be optimistic about in this industry.”
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