LEGAL EASE: Build-to-rent in the UK

The UK’s residential income investment market is changing rapidly with increased political focus, leasehold reform, new entrants and insatiable housing demand.

There are urgent opportunities for institutional investors to be part of this new infrastructure sector and meet a social purpose. Traditionally, institutional investors have been reluctant to invest heavily in residential property, with ground rent investment and social housing the only exceptions. Build-to-rent (BTR) and assisted housing are appealing entry points.

Part of the professional rented sector (PRS), BTR homes are purpose-built at scale, often using modern construction methods. They are for long-term rent and – backed by government policy and funding – offer investors the chance to shape a long-term solution to the housing shortage.

The UK BTR model offers diverse opportunities for different investors. In the US – where BTR is long-established – the developer handles everything from site identification and financing to managing the homes. The UK model is fragmented, involving different parties at various stages: for example, using risk capital, private equity or debt enables first-stage investors to benefit from uplift in developed land values, while funds take the long-term indexed income upon exit.

BTR offers the opportunity to diversify portfolios and funds’ index-linked investment streams. It displays many of the same qualities as ground rents and commercial property opportunities that have attracted institutional investors.

There has been an increasing convergence between ground rent investment, hotels, assisted housing and BTR as asset classes. Many BTR schemes operate like boutique hotels – with concierges, roof terraces and shared spaces – meaning the ‘experience’, amenities and brand are key. Crucially, the investment considerations are similar. With an asset like a shopping centre, the yield is high but the investment horizon is relatively short-term (25 years), resulting in high asset churn.

There are clear signs of growing investor confidence. British Land, the UK-listed Reit (real estate investment trust), manages £18.1 billion (€20.3 billion) in assets; 98% of its portfolio is split between office and retail, with just 2% in residential assets. However, it has recently announced that it is developing an ambitious in-house PRS team, demonstrating confidence in the long-term future of BTR. Other institutional investors in BTR include M&G, Civitas Reit and PfP Capital.

While there is plenty of information to aid decisions on assets like hotels, data on BTR remains scarce as the first schemes near completion. As the market matures, verified data will provide greater assurances and expected yields. BTR’s secondary investment market will become more of a feature as schemes are built, allowing funds to invest in a different part of the market and avoid first-mover risk.

Demand far outstrips supply. Renting is changing: people are looking for diverse ways of living and BTR offers a new model to fit different lifestyle choices. Already gaining traction on the political agenda, BTR will be an increasing priority for developers, local authorities and investors alike.

James Duncan heads Winckworth Sherwood’s PRS team

©2018 funds europe



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