Boxing smart – a look at the UK BtR market

Given the amount written about Build to Rent (BtR) in the UK, it’s difficult to come up with a new metaphor for its progress. But looking back since the inception of the asset class and progress over the last five years, we see some similarities with a boxer (if you look hard enough). In the early years there was much promise and perhaps the potential was overhyped. But after lots of hard work, hits and training, the boxer is now starting to post regular victories, with a lot by knock-out! We’re not at the stage of claiming it is the undefeated, heavyweight champion of the asset classes, but its track record and career are proven and it has many loyal fans.

BtR attracting investment

The punches do hurt though. BtR hasn’t been unaffected by the issues of Brexit, COVID-19, high interest rates and inflation. But over GBP5 billion was invested in UK BtR in the 12 months to Q3 2022.¹ This will have undoubtedly slowed during the end of 2022 and beginning of 2023 because of general caution, but the wider fundamentals in the market actually allow BtR to recover more quickly than its opponents and throw a few punches of its own.

Buy-to-let landlords are leaving the market because of high taxation and regulation by the UK government. Rental market supply is lagging far behind demand. This is compounded in many major urban areas by a lack of purpose-built student accommodation and high graduate recruitment rates. This has led to companies like Watkin Jones to look at both the PBSA² and multi-family markets as the distinction between the two becomes blurred. But BtR is light and agile against its older and heavier PBSA opponent. And it has the benefit of being able to pivot to the changing demographic of renters and their different needs and styles.

Can BtR compete?

2023 certainly looks like being a bit of a fight. But BtR seems well placed to put up a stout defense. Agents are predicting that housing transactions in the UK will fall by around 25% in 2023.³ A fall in value of house prices will lead to a large drop in transactional activity. Rental markets will benefit from this with potentially almost double the number of first-time buyers (circa 250,000) looking for rental accommodation. By default BtR will pick up a lot of new fans who turn to them as the only realistic contender at their stage in life.

Given the energy crisis and increasing awareness and fear over climate change, fitness levels of the main contenders is under greater scrutiny in the living market than ever before. Investors and property companies have committed to objectives and targets for the decarbonization of buildings, with 88% of UK respondents to the latest Investors Intentions Survey by CBRE⁴ saying ESG criteria will continue to be adopted in all investment decisions this year. With the increase in development costs, who will pay more to ensure their asset punches above its weight in relation to some of the new criteria for measurement of sustainability?

Private for sale housing has always been very price sensitive. Older, often poorly performing homes demand higher prices than newer, more environmentally designed new builds. This isn’t true for BtR. A study of tenants suggested 40% would be willing to pay more for an environmentally friendly home. The majority cite lower energy bills as the reason.

BtR also has the benefit of being able to take a longer career view. PBSA tenants, in the main, stay with the provider during their time at a particular institution and then move away. In the BtR world, there’s potentially a longer relationship where investment into greener technologies could be spread over a longer period. For sale housing developers largely lose their connection with their homes on sale.

Targeting the right market

Perhaps the biggest strength of BtR is its ability to fight across all weight categories. It was clear from the outset that the product wasn’t going to be the same for every demographic and area. But BtR operators are now showing they understand the local market and what will work by operating products across different lines. Much like the hotel business, there’s a type of BtR block that’s most appropriate for its surroundings. Too much of the early BtR focus was around premium projects. Now it’s about finding the right category for the location. A good BtR building doesn’t need a gym if there are already gyms in the local area, or the price point simply doesn’t support it. Operators like Moda are developing buildings targeting a particular section of the market. This is a very good sign of the level of sophistication and maturity of the asset class.

Another sign of maturity – which doesn’t lend itself particularly well to the boxing analogy – is the prevalence of portfolio sales in the market. Most investors have always preferred to purchase operational stock with a proven track record, rather than take on development risk. But because of the lack of standing stock, the majority like M&G and L&G, have had to move into some element of the development of the assets.

Portfolios also seem to be helping valuations, which are increasingly based on a discounted cashflow basis, with assumptions around operating costs, vacancy levels and capital expenditure, as opposed to the slightly outdated “break-up value.”⁵ This will help attract new types of investor into the market, ultimately increasing demand and bolstering prices.

Building a brand

One thing where perhaps BtR has a lesson to learn from boxing is around individual brand. There’s some amazing buildings hitting the market providing tailored amenities that suit their surroundings and the consumer. But the emergence of brands still seems to be slow. Companies like Moda, Apache, Greystar, Realstar and Quintain are known to the public, but it feels like with a bit more shameless self-promotion there could be even more value in the logos they have created.

So it feels like BtR is training, getting stronger, more skillful, able to take a few punches, maturing and starting to trash talk! This is a huge step. But perhaps the time really is now, when other asset classes become mired in a lack of investment, viability issues and gloomy outlooks, for BtR to take center stage and to truly develop into one of the country’s property heavyweights.