Beds for rent: The golden age
“Build-to-rent (BTR) in the UK is still in its early stages, but there is a huge amount of capital support.
“Investors can get a good read on build-to-rent; they understand the demographics, the stability of cash flow and that their capital will be serving the community, which is aligned with the needs of their own stakeholders.”
This was the view of Ailish Christian-West, Director of Real Estate at Get Living, the UK’s top owner and operator of BTR homes. Its East Village regeneration of the former Olympic Village in East London’s Stratford has been the trailblazer for so much of the BTR development that has followed.
Investors can get a good read on build-to-rent; they understand the demographics, the stability of cash flow and that their capital will be serving the community, which is aligned with the needs of their own stakeholders.
Her views reflected those of the global institutional investors we polled, with BTR continuing to grow in appeal even from a high-water mark of 2019.
Prospects for the coming years are good too, with BTR having fared better than the office, retail, and leisure sectors during the pandemic when looking at the rent collection statistics, share price performance of the listed companies investing in these sectors, and the yields at which assets have traded.
Paul Bashir, CEO Europe at alternatives real estate investment specialist Harrison Street, said: “There have been a lot of trends in real estate which have been influenced by Covid-19.
“Build-to-rent is benefiting from significant tailwinds as a result, with people becoming more focused on affordable homes, flexibility and amenities because they are spending more time in their homes. City centre build-to-rent is still compelling but there is also a growing argument for suburban or commuter build-to-rent.”
Both Christian-West and Bashir pointed to a growing sense of community within BTR developments during the pandemic, with East Village becoming one of the banner locations for the NHS ‘Clap for Carers’ phenomenon in spring 2020’s first lockdown.
Bashir continued: “Throughout the pandemic, we have had very high rental collection in BTR: 90%-plus across Europe.
“Lockdown has helped the take-up of experiential activities in build-to-rent, like yoga on the balcony and cookery courses on Zoom. It has strengthened these new communities.”
According to British Property Federation1, Molior2 and Savills3 research, BTR development continued apace during 2020 with 53,750 BTR units completed by Q4 2020, compared with 43,598 a year before.
In total there were 179,835 BTR homes completed, under construction or in planning in the fourth quarter of last year, compared with 151,722 at the same time in 2019 – a 19% rise.
The rate of increase was sharpest in the regions, with a 28% rise in the total figure to 99,114. In London, there was also an 8% rise in completions, projects under construction and those in planning, which takes the total up to 80,721.
Student accommodation investment hangs in the balance
Whilst investor exposure to the student accommodation sector has grown since the last Future Living report, it is the ‘Living’ sector asset class that has come under the most pressure, as restrictions on foreign travel and in person teaching have driven down occupancy.
Whilst slightly skewed by Blackstone’s record-breaking acquisition of iQ Student Accommodation, investors spent £5.77 billion on the sector last year, a 5.7% increase on 20194, with other new investors entering the sector during 2020 including Crosstree, Barings, Ares and Franklin Templeton.
Harrison Street’s Bashir, a major investor in the student sector, said: “2020 was difficult for the student accommodation sector because operators were playing catch-up to a `point-in-time’ event.
“But student accommodation has really proved itself now, with online teaching proven to be inferior to face-to-face, students still keen to be based away from home and a significant increase in 18- and-19 year-olds on the way. The sector will rebound quickly in 2021.”
Savills reported that investor confidence started to grow again at the end of the year off the back of the UK’s Covid-19 vaccination programme, and this has been borne out in recent months, with investors including Lone Star, Patron Capital and Ares Management, all buying in the sector.
There is no doubt, though, that Covid-19 has rattled some global investors. Many higher education establishments are persisting in plans for online learning despite frustration among students and until there is clarity on this front, optimism is likely to be subdued.
This is reflected in the survey, with student accommodation considered “particularly appealing” by just 31% of respondents over the next five years, and 25% over the next 10 years.
Moorfield’s Ferguson-Davie said: “For purpose built student accommodation, the next 12 to 18 months may be challenging. But if you look forward 10 years, there are no reasons why the sector should be of any less interest. But you should get a higher yield for student accommodation than build-to-rent at the moment and if you can buy at a higher yield, it compensates for that added risk.”
We’re currently seeing significant growth in GDP, in part due to the unlocking of the economy and massive government stimulus, so a number of commentators are questioning the possibility of excessive inflation, which could ultimately lead to an increase in interest rates.
Mark Bladon agrees “We’re currently seeing significant growth in GDP, in part due to the unlocking of the economy and massive government stimulus, so a number of commentators are questioning the possibility of excessive inflation, which could ultimately lead to an increase in interest rates. This could further increase the appeal of ‘beds for rent’ as the ability to reprice rents annually offers investors greater protection than more traditional full repairing and insuring FRI leases common for office, retail or industrial assets, for example.”
Student accommodation occupancy was lower than expected in 2020, with the sector’s largest operator Unite reporting a fall from 98% in 2019/20 to 88% in 2020/21.
However, while rent collection and occupancy have decreased in student accommodation, they have fallen less than in other sectors. For example, landlords collected just 42% of shopping centre rents in the fourth quarter of last year.
There has been very little outward yield movement, though, with yields remaining stable at 3.90% for prime London, 4.75% for superprime regional and 5.25% for prime regional assets5. This suggests that investors see Covid-19’s challenges to the sector as temporary rather than symptomatic of a structural decline.
1 British Property Federation, UK build-to-rent housing supply grows in 2020 despite Covid-19, 2021 (Link)
2 Molior, BTS + BTR January 2021, 2021 (Link)
3 Savills, UK Build-to-Rent Market Update – Q4 2020, 2021 (Link)
4 Savills, Spotlight: UK Purpose-Built Student Accommodation, 2021 (Link)
5 CBRE, UK Bed Sectors Property Investment Yields June 2021, 2021, p.1 (Link).
Head of Real Estate
Mark is Head of Real Estate lending responsible for over £1bn of loan assets, and specialises in providing development finance for industrial, residential and student accommodation projects across the capital stack.
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Beds for rent: The golden age