Dan Batterton of LGIM explains how the BTR sector has filled a gap in the market and serves demand in modern rental investment
In the space of a few years, the UK Build to Rent (BTR) sector has come into its own. While not a new phenomenon globally, it has cemented its position in the UK as a distinct asset class, evolving away from the pre-existing private rented sector.
Precipitated by the introduction of buy to let mortgages in the 1990s, owning rental property has been a popular investment for small businesses and individuals for decades. However, a lack of investable assets at scale, the absence of investment vehicles with a robust track record, and the intensity of day-to-day management tasks has historically held back institutional investment.
Today's landscape for rental investment has significantly changed. Demand has continued to increase, with 1.7 million more rental households in 2017 compared with 2007, according to the ONS. This means that rental homes need to be built at scale, something that smaller landlords cannot do meaningfully. Tax and regulatory changes have also started to bear down on amateur landlords, leaving a gap in the market that has been seized upon by long-term institutional investors.
This has come in the form of Purpose-Built BTR: a distinct investment type, with different physical and operational characteristics compared with converted stock. Large, multi-unit blocks offer the scale to attract large investments, which ensures schemes are built to meet tenant needs and designed in the most operationally efficient specification possible.
Economies of scale reduce overall running costs, while increasing net income flows. This allows operators to provide a variety of facilities and amenities such as free Wi-Fi, 24-7 handymen, gyms and resident lounges, giving residents access to lifestyle services that home ownership and rental of converted stock cannot. This institutional approach means the UK's rental sector can be professionalised, setting new industry standards in management.
As the sector has matured, it has attracted alternative sources of capital into the residential market. Unlike traditional house building, typically adopting a short-term investment approach, BTR focuses on long-term income streams. This has made it attractive to pension funds, helping to meet long-term liabilities, while providing a hedge against inflation. Legal & General, for example, has raised capital from major pension funds for its BTR fund, including a partnership with Dutch pension fund manager PGGM.
The investment rationale for Purpose-Built BTR is a strong one: investments are underpinned by stable occupancy rates, producing consistent cash flows, rental growth continues to outstrip inflation and needs-based demand is decoupled from economic volatility.
Building large schemes has a number of advantages. Sites can be cherry-picked in areas of potential high growth and demand, maximising returns, while providing homes in areas that need it. Legal & General, for example, has focused on key regeneration areas such as Salford that have been transformed with improved services and infrastructure, attracting new residents.
Purpose-Built BTR can also be delivered much faster than other forms of housing. Compared with 'For Sale' developments, investor capital can be deployed and start generating returns far more rapidly.
This speed of delivery means the sector has received wide government support as a route towards tackling the UK's housing crisis. In terms of new and upcoming construction starts, Purpose-Built BTR has 110,000 homes currently in the pipeline, according to the British Property Federation and Savills. The sector will make a powerful contribution towards delivering the 300,000 new homes needed each year in the UK. This should have knock-on effects on both rental and For Sale home affordability, beginning to help tackle the current supply/demand imbalance.
The continued structural shift towards renting only further reinforces demand for Purpose-Built BTR. Long-term, transparent leases will continue to attract residents looking for flexibility and security, as well as those looking for a more lifestyle-led proposition. In a time of economic uncertainty, diversification benefits from more cyclical investments also continues to attract capital from an increasing number of alternative sources, meaning the future looks bright for Purpose-Built BTR.
Dan Batterton is senior fund manager, UK Build to Rent Fund, at LGIM Real Assets