Build to Rent SFH – should it be that hard?

Build to Rent Single Family Housing is attractive to a multitude of investors – so should it be that hard?

SFH Build to Rent homes | BTR News

As Build to Rent continues its inexorable rise, filling in the gaps of the PRS as private landlords continue to wring their hands over taxation and regulation, the sector looks to broaden its appeal to renters by broadening its offer. Single Family Housing (SFH) is one of those subsectors that has the eye of investors.

By Richard Berridge, Blackbird RE Advisory

At first glance it’s a no brainer. In the UK the dominant housing typology is houses. Some 80% of us live in these boxes, secure in our own solipsistic environment. Even in the PRS, which is generally assumed to be a staging post for those aspiring to own, and so one would expect to be a flat, houses form 56% of the sector. So, clearly, there’s a predominant typology in which institutional investment has barely scratched the surface. About 12% of completed operational Build to Rent is houses and about half of that comes from just one investor – Sigma/PRSREIT.

Appellative consistency

The more I discuss SFH with colleagues in the wider Build to Rent sector, the more I realise there isn’t a consistent understanding of, or belief in, what SFH is. Part of the problem is inconsistent use of a descriptor which has led to some confusion over the product typology.

Suburban Build to Rent for instance is used by some as a synonym for SFH. This has led to a belief that SFH also incudes low level ‘walk up’ apartment blocks. It doesn’t! Very simply, SFH is houses: either terraced, semi-detached or detached.   

The other issue is the ‘two countries separated by a common language’ conundrum. Whilst we think terminology in the US is common to the UK, it very often isn’t. Particularly when it comes to residential investment.  

A false dawn?

Eyebrows were certainly raised when Goldman Sachs acquired the Thistle portfolio from Sigma & Gatehouse Bank in January 2021 for £150m – representing a net yield of circa 4.1%.  Up to that point, investors would not have considered a portfolio of houses in the North to be valued off anything like that cap rate.

This transaction immediately reset the bar for SFH. It was helpful in some respects as investors came to appreciate the underlying characteristics of the sector: high occupancy, longer tenancy lengths, low churn, low delinquency and a significantly less complicated product. So, the risk profile, a factor in determining cap’ rates, was low.

But was this ‘realignment of expectation’ too much too soon? What impact did it have on transactional activity? There was a realisation that whilst SFH was working and feasible in the North East and the Midlands, it also needed to work in other areas: Oxford-Cambridge arc, East Anglia, the South East and West. The problem was that traditional extrapolation from yields in the North + capital values in the South East and West meant that cap rates were uncomfortably close to, or even below, those in Prime Central London. And despite lower OpEx, for many investors, that was not viable.

In my 2021 paper – Single Family Housing: The Home of Residential Investment – I laid out the rationale for houses as a crucial element of institutional investment in living spaces. Many of the drivers still hold true today: an increase in working from home, the evolution of millennials into elementary families, the desire for greater space and increasingly unaffordable home ownership.

So, despite the ‘yield shock’ I expect the Trussenomic meltdown to have a sobering effect on expectations. This will align with investor requirements and SFH will ultimately achieve plurality in the living spaces investment sector over time. 

But there’s another hurdle to overcome, and it’s one that investors are really struggling with.

Scaleability

This was never going to be easy. The gentler density defines the nature of the product, the environment and the community. This means that a direct translation from urban Build to Rent principles and scale is unworkable. Whilst SFH will benefit from the experience of developing the urban Build to Rent proposition, it is clearly a different product, aimed at more mature cohort with different requirements. So, applying Build to Rent scale is unworkable. The most recent deal between L&G and Cala Homes for 107 houses, and Placefirst’s public consultation for 146 houses in Newcastle is an example of the scale of deal likely to be common. If we look at currently operational SFH, the average scheme size is a little over 60.

So, what are the options for institutions whose incentive to get out of bed is somewhat higher than 60 houses on the outskirts of a market town?

Collaboration and partnerships:  We have already seen how this can work. We know the usual suspects so let’s not name them here. This gives the investors access to a larger number of schemes either across a region or nationally and it ensures a pipeline of future product. It also underwrites the balance sheet of the delivery partner and gives them bigger muscles to flex.

House builders: It all depends on government incentives, HTB etc, and where we are in the great UK home buying cycle. House builders have consented schemes, a land bank to draw upon and a workforce infrastructure to keep busy. Traditionally, deals with house builders will have been contingent on the property cycle, but it’s entirely possible that, in addition to satisfying home ownership demand, they will create business units to service investors and create real additionality. This will accelerate the number of homes built each year. God knows we need them.

Aggregation: Not pretty, a bit random, somewhat opportunistic, labour intensive and will probably depend on working with a plethora of SME’s. It is also likely to yield smaller schemes from fishing in a bigger pool of regional or local counterparties. Many of the principal UK consultancies also work with vastly wealthy pan-global investors, so the initial scale will not be of interest to them. However, we will start to see the emergence of aggregation specialists whose raison d’être will be to build substantial portfolios from smaller schemes within a measured timeframe and with a predetermined exit strategy. The likely fragmented nature of such portfolios may not appeal to all investors, but it will create scale. When I last looked, there were over 4,000 sites with consent for 100 houses or more across England (source Glenigan).

Buy a housebuilder:  This has already been done. L&G own Cala, Lone Star acquired both Quintain and McCarthy & Stone, Bridgepoint own Miller Homes, and M&G have bought a majority stake in Greencore. So, this is not a new strategy. This gives the investor complete strategic control over where, how many, and when a SFH scheme is delivered. It also gives the investor more freedom to look at modern methods of construction, benefit from R&D, and bake in net zero strategies without having to negotiate with a partner or any counterparty.

Wait: Lazy? A bit passive and just a bit hopeful. For sure, parcels of stabilised SFH will come to market and investors will, in time, buy from other investors. Such transactions are likely to be agreed amongst investors with existing portfolios. So, waiting two or three years for an ideal opportunity to pop up in the market to begin the SFH investment journey probably illustrates an ambiguity to the sector it can do without. It also carries greater risk since such portfolios may find themselves being labelled stranded assets, as the drive to net zero increases. Second hand can sometimes be very second hand.

Operational Management: One of the key features of SFH is that schemes are likely to be widely dispersed. Whereas urban Build to Rent may contain 500 homes at a single location, you may find a similar number of SFH homes across as many as ten locations. I often hear ‘but how can it be managed?’ Is this proving a barrier to institutional investment? Only, I think, if one tries to implement an operational management strategy based on the Build to Rent canon. Research for my paper found that occupiers of houses do not need or want the level of engagement that has become the normal provision for flat dwellers.

Clearly, a level of proactive engagement is desirable, but the events planning, and associated amenity is not necessary. The demographic is more mature, relishes the autonomy a house provides, is more settled and with very different requirements. Friends and neighbours may not even be renters, such is the favourable tenure mix which promotes long term rental.

My discussions with various tech businesses illustrates to me that nearly every aspect of renter engagement can be managed remotely. There are so many solution driven providers it’s not possible to list them. Employed professionally and creatively, whether it’s renter wellbeing, fintech applications, energy management and monitoring or issue diagnosis, there’s a proven platform to deal with it. Management doesn’t need to be on site. It just needs to be responsive and professional. The solutions are there and shouldn’t be an impediment to investors.

But, if you’re absolutely desperate to build amenity, make it childcare, sort out the compliance, and the renters will love you for it.

Where now?

Elementally, like many assets, SFH is attractive to a multitude of investors: both domestic and international – each with a strategy and capital base unique to themselves. Interest in the sector is not the issue. The fundamentals of SFH are, as we know, attractive, particularly as a long-term investment where the renter behaviour is strongly aligned with long termism.

Investors are going to have to come to terms with the fact that the scale to which they have become accustom in urban Build to Rent, is not achievable or desirable in sub/exurban SFH.  As for the operational management, it’s all about professionalism and not amenity. So, we are going to have to see a shift in investor strategy if SFH is to match the 56-44 ratio of houses to flats we see in the PRS.

So, should it be so hard? No. If these cognitive hurdles can be overcome, I expect to see growth in SFH continue; slowly at first, but ultimately to dominate the overall Build to Rent investor landscape.