Build-to-rent facilities provide an opportunity for institutional investors and pension schemes to secure an attractive long-term asset.
Low interest on savings and inflated house prices have meant that many in the UK have been unable to climb onto the property ladder. A fifth of the UK population are now living in private rental accommodation, leading to the nickname “generation rent”.
This has changed the rental landscape with build-to-rent (BTR) facilities offering tenants customer-friendly contracts, for professionally managed sites with attractive communal facilities. As these sites gain popularity, an opportunity has presented itself for institutional investors like insurers and pension schemes to secure an attractive long-term asset that could offer an attractive return and diversification.
1. Introduction to BTR
“Build-to-rent” properties are defined as professionally managed, rental accommodation typically consisting of a number of units. The asset profits from rent over expenses, so the properties often include communal facilities that aim minimize voids and tenant turnover, while their design is focused on operationally efficiency.
As an asset class, BTR is exposed to a wide range of risks reflecting the operation burden, tenant demands, as well as risks inherent to property as a wider class. An investor can, however, expect to be rewarded with a high running yield as well as potential for capital growth. Additionally, exposure to the asset class can be through a number of different structures, from direct equity to construction stage debt instruments, giving investors flexibility.
2. The BTR market
The “build-to-rent” market is relatively immature in the UK with the purchase and conversion of the London Olympic Village in 2011 seen as the birth of BTR in the UK. After that a number of pioneering institutional investors entered the market, whilst recent years have seen the investments from large annuity companies.
However, the market is still in its infancy especially compared to the student housing or US Multi-family housing market with which clear parallels can be drawn. According to the British Property Federation, as at Q3 2020, there are c.51,000 completed BTR units in the UK and a further c.120,000 either in planning or under construction.
3. Investor considerations
As with an asset class there will be a number of considerations before an institutional investor will decide in BTR rent assets. Some of these are:
- Investor appetite- A investor’s risk appetite will determine if they invest in the asset class as well as the instrument used to invest. For example, a higher risk investor may be willing to take on some early phase construction risk, whilst an annuity provider may want the longer-term operational phase debt.
- Liquidity – How easily an asset can be converted into cash at the prevailing fair value is a factor for any institutional investor. This is especially true for property where individual assets are unique.
- Valuation – As there is not likely to be an observable market price, firms will have to think carefully about how to recognise the value of assets on their balance sheets.
- Capital treatment – Both pension schemes and insurance companies are required to hold assets to back their liabilities. Firms will have to consider the capital implications of their assets especially as in recent years, the capital treatment of income producing property has been an area of focus for regulators.
In our thought leadership, we explore how BTR provides an interesting opportunity for institutional investors, both in terms of meeting investment objectives and its social contribution.
