Build to Rent sector should embrace private capital as much as institutional

RE Capital argues that the Build to Rent sector should be embracing private capital to support building the homes we need.

Yuan Sun, Head of UK at RE Capital argues that the Build to Rent sector should be embracing private capital | BTR News
Yuan Sun, Head of UK at RE Capital argues that the Build to Rent sector should be embracing private capital.

The UK is experiencing a housing crisis and a large part of how we can build the homes we need will be through embracing private capital, argues Yuan Sun of RE Capital, the property company specialising in repurposed real estate in Europe’s cosmopolitan cities.

By Yuan Sun, Head of UK, RE Capital

One of the least controversial statements one can make in the UK right now is that it, and London in particular, is experiencing a housing crisis. Regardless of where one is on the political spectrum – regardless even of where one is on the NIMBYism spectrum – we all agree that we need new homes.

Where and what type of homes is much more contestable

Looking at the evidence, however, and it’s clear that private Build to Rent needs to be a central focus in the new homes we develop in London. By dramatically increasing the number of Build to Rent homes on offer, we can significantly increase the consumer experience in a way that focusing on build-to-sell alone, with only a smattering of Build to Rent properties, would leave us unable to achieve. It also provides a more compelling investment case for institutional and private capital to provide a spread of tenures (and risk in the portfolio).

And while institutional investment is ploughing into the sector – with the likes of L&G seeing private Build to Rent as a core part of the levelling up agenda – what we need more of to build enough new homes is private capital. That of high-net-worth individuals (HNWIs), private family offices and other private equity sources.

But first of all, let’s look at why the investment case is so strong for Build to Rent in London right now.

London is a Build to Rent investor’s market

The Covid pandemic changed people’s buying preference, resulting in weaker price growth in London. Prices UK-wide have grown 1.9% per annum in the year to May 2023 compared to 0.8% in London, according to data from the Office for National Statistics.

Covid and mortgage affordability has dramatically dampened demand for buying housing in London. In October 2022, for example, transaction levels were 50% of the year-to-date levels from 2019, and yet demand remains high for homes in London as evidenced by the 5.3% increase in private sector rents over the 12 months to June 2023. With a chronic shortage of housing and population forecast to grow substantially in the coming decade, the government has previously estimated that 66,000 new homes are needed in London every year.

So why Build to Rent and not just new homes of whatever tenure? Because, in London, there are approximately 950,000 households who rent privately. An estimated 90,000 of these belong to the 60th percentile or higher in terms of income and have the financial capacity to purchase a newly constructed property in the city. And yet… only 17,000 new private homes were completed in 2022.

That gap of 73,000 is evidence of the need to create high quality homes, in both rental and for-sale tenures. That such a large proportion of higher income households choose to rent, mostly through private landlords, is evidence of the desire for London living that can’t simply be catered to with building either new homes for sale in the centre of the city, which are sometimes out of reach for many households, or the suburbs, which lack the vibrancy of city centre living that some crave.

More Build to Rent homes, then, are necessary to better meeting the demand for consumers for city centre living. And given the supply-demand imbalance, this likewise presents a huge opportunity for private as well as institutional capital.

Yet, although institutional capital is ploughing into the city, we hear much less of private capital. That’s something we need to address.

And the good news is that there is a compelling case for private capital to flow into Build to Rent.

The case for private capital

The likes of L&G invest so heavily in Build to Rent because they see it as a fundamentally necessary component of a properly functioning and societally beneficial housing market. It not only delivers financial returns but is a valuable piece of any social impact strategy.

For private capital, it is the same – with the added benefit that in an opportunistic and somewhat volatile market, more nimble operators can move quicker to take advantage.

Amid continued high interest rates because of the Bank of England’s war on inflation, financing costs will keep increasing and, in some cases, unsustainable debt costs of some investors. If private capital sources, such as HNWIs and private family offices are sufficiently savvy, they’ll have opportunities to secure quality assets at more attractive price points.

Build to Rent will also play a part in firms’ strategies to de-risk their investment portfolios. According to Knight Frank’s HNW Pulse Survey, 32% of HNWIs plan to increase their holdings of residential property in line with their primary goals: capital appreciation, capital preservation, income generation and diversification.

And these investments will be most fruitful this year, with the economy still relatively volatile but the fundamentals of Build to Rent strong – and the likelihood of recovery in 2024.

Assuming that firms have solid asset management plans in place, which is why we at RE Capital have our own in-house property management company Mirabilis, they are in a good position.

They can make the most of the opportunistic market this year to secure assets at a good price. They have the opportunity to maximise the impact of the strong fundamentals of the rental market in securing a good, stable and inflation-linked income, and they will be in a prime position once the market has indeed recovered.

At RE Capital, where we co-invest alongside both institutional and private capital, we expect to see the latter truly discovering private capital this year. And, amid a housing crisis that shows no signs of abating, this is a really positive step forward.