Build to Rent investment hits record for fourth consecutive year

Build to Rent investment hits record for fourth consecutive year and will continue to be key target for investors in 2023, according to Savills.

Build to Rent statistics from Savills | BTR News

Build to Rent remains one of the most in-demand UK real estate sectors, receiving £4.3bn of investment (based on actual capital allocated rather than GDV and excludes commitment/partnership announcements) in 2022, according to global real estate advisory firm Savills.

“Multifamily continues to be very attractive to investors in the current economic climate, given its inflation-matching characteristics and structural headwinds, including increased demand from renters, a supply shortfall and challenges to home ownership.

“Yields have proven resilient in relation to other real estate asset classes, supported by rental growth and strong operational performance. Those who have already invested in multifamily over the last few years have enjoyed rising rents, high occupancy and record lease up rates, which has more than compensated for higher costs across their business.”

Polly Simpson, Head of Multifamily Development (Operational Capital Markets division), Savills

Savills’ latest Investor Sentiment Survey in Q3 2022 revealed that nearly two-thirds of European investors are likely to invest in UK multifamily in the next 12 months. Demand has been driven by consistent rental growth and a shortage of rental homes relative to demand. In the latest RICS sentiment survey, a net balance of +43% respondents reported rising tenant demand in January 2022, above the 2017 to 2019 average (+10%).

“Yields softened as a result of market uncertainty during the second half of 2022. But strong rental growth has meant that this has not fed through to capital value falls. As we move into 2023, investors will be looking to see increased liquidity in the market, which will help them firm up fair market pricing.

“Investors will also be keeping an eye on rental growth and what is happening to the long-term, risk-free rate over the coming months. Savills expects rental growth to continue and have forecast 6.5% rental growth in 2023. With legacy deals closing and new opportunities coming to the market, we do expect to see a rise in investor confidence as we continue through Q1.”

Guy Whittaker, Head of Build to Rent Research, Savills

Forward funding has been an integral part of multifamily expansion in the UK, with 75% of investment in the past five years coming via this route. Nearly £900m was deployed to forward fund developments in Q4 2022 alone.

“A typical multifamily block will take between two and four years to build and stabilise, and with strong rental growth in the wider market, Net Operating Income (NOI) can be higher than projected – driving up the yield on cost and widening the premium over the risk-free rate, encouraging investors to commit equity via forward funding. We can expect this method of funding to remain popular over the coming year, despite a changed macroeconomic outlook.”

Polly Simpson, Head of Multifamily Development (Operational Capital Markets division), Savills

A landmark transaction in Q4 2022 was PIC’s forward funding agreement for One Eastside in Birmingham, where Savills advised. The c.£200m investment will fund the construction of 667 apartments in what is expected to be the tallest Build to Rent tower outside of London.

According to Savills, the elevated cost of debt remains a challenge for investors – having nearly doubled over a typical five-year period. This means highly leveraged investors are unlikely to be able to generate the same cash-on-cash returns as a year ago, leading some parties to temporarily pause acquisition activity. But, this presents an opportunity for less geared investors to take advantage of reduced competition and secure assets.

The company also reports that 80% of UK multifamily investment has come from 36 investors to date, of which many are ungeared or lowly geared. Savills estimates that nearly two-thirds of this group will be able to deploy equity with low gearing in the next year.

Savills says that the wider economic context has made partnering with an investor more attractive to developers, due to the additional security it provides and the lack of alternative development opportunities. Such forward funding arrangements mean developers avoid the use of debt to finance projects – giving them a guaranteed exit on completion at a price agreed before construction begins.

Savills expects Build to Rent to take up a greater share of housing starts in 2023. Nearly 16,000 Build to Rent apartments started in 2022 across England.

“A recognised benefit of multifamily is that it can accelerate housing delivery as it allows developers to continue to deliver homes to buyers while also delivering for large-scale investors. On larger sites in particular, multifamily can increase delivery rates over and above the normal annual target for open market sales due to its more diverse occupier base, allowing both tenures to be delivered on the same site at the same time.”

Polly Simpson, Head of Multifamily Development (Operational Capital Markets division), Savills