The build-to-rent (BTR) sector has bucked property investment trends through recent economic challenges. However, that doesn’t mean rising borrowing costs and high inflation aren’t influencing investment strategies and deals.
Here are four key takeaways from our Capitalise Living Conference.
1. Growth of investor interest
According to BNP Paribas Real Estate research, investment volumes totalled £8bn in Q1 this year, with an estimated £2bn of that going into the living sector, of which £1.1bn was for BTR.
For investors, the market fundamentals are strong. There is a historic shortfall in meeting housing delivery targets and high demand with a growing population.
The private rental sector has also shrunk. Changes to regulations, taxation, interest rates and EPC requirements have resulted in an exodus of buy-to-let landlords from the rental sector.
BNPPRE research shows around 300,000 rental homes have disappeared from the market, and the decreasing supply has added upward pressure to rents.
2. Renting as a necessity vs lifestyle choice
While high house prices and rising mortgage costs are a big driver for people renting, research suggests it's also becoming a lifestyle choice.
For its Housing Future survey, Strutt & Parker canvassed consumers who are looking to move in the next five years.
Among those who said they would prefer to rent their next home, the most common reason given was living in a managed property with no responsibility for repairs and maintenance.
Are the benefits of renting becoming more recognised, leading to a cultural shift? Perhaps.
It is further evidence of the opportunity for BTR to provide quality stable homes. The sector currently accounts for less than 1% of the total housing stock.
3. Pricing uncertainty and debt challenges
Low economic growth, high inflation and rising interest rates have contributed to softening investment yields in most property sectors but not BTR. Yields for the sector have moved out by only 25bps and remained more resilient due to huge investor demand and limited supply.
We are currently in pricing discovery, where investors are seeking to pay less due to rising interest rates and macro-economic uncertainty, while developers are looking for higher prices to cover increasing construction costs. The problem is this has created uncertainty around pricing and delayed execution.
Then there is the impact of rising costs of borrowing and the impact that will have on funding. There are a good number of lenders interested in the BTR market, which is good news, particularly for those who are refinancing, albeit at a higher cost.
However, some investors are funding 100% equity in the short term, with a plan to review debt options in the future when interest rates become more certain and accretive to investor returns.
Higher borrowing costs are being weighed against good prospects for further rental growth, but there is concern about how rent inflation sits within the landscape of the cost of living crisis and affordability.
4. Rent caps – the fly in the ointment
A potential fly in the ointment for the BTR sector is the threat of widespread rent caps. They’ve already been introduced in some form in Scotland and Dublin.
The understandable concern is that having policy dictate rental growth rather than the market forces will dampen investment appetite and, therefore, supply.
The message from those in the industry is that any policy or regulations relating to rents need very careful consideration and appropriate industry consultation, or risk making the supply situation worse and creating a false rental economy.
It must also be weighed against rising operational costs, and any form of rent caps needs to be a long-term, index-linked policy so there is investor certainty over pricing and return expectations.
Rents are rising because housing demand outstrips supply, so encouraging more development of all types of housing, including BTR stock, would be a more effective solution than rental controls. Increasing BTR supply has the added benefit of being professionally developed, managed and funded, which would provide a better quality of rental stock to the market.
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