Build to Rent - Ready to become institutionalised?
BTR has emerged in response to soaring demand, with new developments reflecting the changing needs of modern renters.
October 18, 2018Real Estate
Europe GRI 2018 hosted a dedicated discussion on where the build to rent residential asset class was going for investors, lenders and developers. Such opportunities for build to rent residential in european cities were weighed up, presenting sentiments on whether residential supply was ‘bottled up’ and how far the asset class was from being institutionalised.
The one stop opportunity shop?
While BTR is well developed in Germany and France, for many countries, it sparks a completely new market; even for the UK who are seeing great interest from overseas investors. Inspired by what’s available in large parts of Europe and North America, where it is known as ‘multifamily housing’, build to rent has emerged in response to soaring demand for quality rental housing, with new developments reflecting the changing needs and priorities of modern renters. This was compared with other markets such as Spain and Italy, who have the same eye watering demand for residential development but suffer from a lack of product and liquidity to attract institutional investors. However, some participants echoed caution so the market do not accidentally become oversupplied. Such sentiments were echoed recently at our GRI Club meeting dedicated to global investments in Italy on the 16th October.
Will the winners be defined by a hospitality serviced driven approach to asset development and management?
To attract clients, developers and investors should create an emotive story, a brand is essential to target customers. This might include the image of the residences, but also the line of services available. It was argued such hospitality and service driven approaches would feel foreign to traditional asset managers and developers and working with the right operating partner would prove essential. However how much cost inputs does the brand and service driven add? Do such numbers work and how affordable might this be to the end user? Whilst costly, services were perceived as essential; it’s what makes a brand stand out to attract and retain tenants. Such thinking led the discussion to thinking about the importance of community, a sense of place and well being; a far cry from traditional residential flats, but also pricey not just for the eventual tenant but a headache for the investor.
Is build to rent the right move forward vs traditional housing?
As institutional investors drive the build to rent economy forward; many questioned the social and economic issues this might have on the markets. Are we creating a market only for the few, what responsibility should the private market have in catering for affordable housing? What types of BTR models should we benchmark against? How might the government impose regulations and suggested rent caps?
To begin to navigate these questions, we might like to draw upon our UK PRS club meeting which took place in June. Whilst it was felt that there were billions of capital to deploy, the debate centred on getting the right mix of affordable, mid-market and luxury products. Co-Working, Micro and Serviced Apartment products were explored, especially whether they could be built to cost and scale. It was advised that more could be done at a local level through releasing land for development.
Whilst most dream of having a dynamic mix of rental, traditional, affordable, multifamily and a high end residential market, the simple fact remains that while demand is critically high for places to live, investors and developers cannot drive demand and the asset class will remain slow to pick up because the market has no way of testing the revenue growth. The responsibility must lie with governments to take some control and use some form of rent benchmarking and viability testing to help pave the way for a liquid pipeline, PRS will remain a business for the brave and innovative few; not an asset class to the many debt and equity investors waiting to enter into the UK and Irish PRS BTR market.
Conclusions
How many were convinced that this asset class was the ‘next hot ticket?’ Not many, and only those that had experience from US and Germany and ready to deploy into the UK. Why? Presently, it was felt that there is a great unknown of what will happen with the rise in interest rates and impacts on house prices, wage growth and worries over a generic economic downturn; not the best time to chase an asset class rich in illiquidity. Whilst build to rent might help in solving the UK housing shortage and turn a profit, but when we look at other European markets, many agreed a one size fits all strategy could not be applied. If so, what will it take to kick start build to rent investment Europe wide and how far off are we for an institutional asset class?
The discussion on European build to rent will continue during the GRI Residential Europe 2018 taking place on 28-29 November in London.
Further your reading on the Europe’s developing residential market here: Residential capital in Europe: fools game in the late cycle?
The one stop opportunity shop?
While BTR is well developed in Germany and France, for many countries, it sparks a completely new market; even for the UK who are seeing great interest from overseas investors. Inspired by what’s available in large parts of Europe and North America, where it is known as ‘multifamily housing’, build to rent has emerged in response to soaring demand for quality rental housing, with new developments reflecting the changing needs and priorities of modern renters. This was compared with other markets such as Spain and Italy, who have the same eye watering demand for residential development but suffer from a lack of product and liquidity to attract institutional investors. However, some participants echoed caution so the market do not accidentally become oversupplied. Such sentiments were echoed recently at our GRI Club meeting dedicated to global investments in Italy on the 16th October.
Will the winners be defined by a hospitality serviced driven approach to asset development and management?
To attract clients, developers and investors should create an emotive story, a brand is essential to target customers. This might include the image of the residences, but also the line of services available. It was argued such hospitality and service driven approaches would feel foreign to traditional asset managers and developers and working with the right operating partner would prove essential. However how much cost inputs does the brand and service driven add? Do such numbers work and how affordable might this be to the end user? Whilst costly, services were perceived as essential; it’s what makes a brand stand out to attract and retain tenants. Such thinking led the discussion to thinking about the importance of community, a sense of place and well being; a far cry from traditional residential flats, but also pricey not just for the eventual tenant but a headache for the investor.
Is build to rent the right move forward vs traditional housing?
As institutional investors drive the build to rent economy forward; many questioned the social and economic issues this might have on the markets. Are we creating a market only for the few, what responsibility should the private market have in catering for affordable housing? What types of BTR models should we benchmark against? How might the government impose regulations and suggested rent caps?
To begin to navigate these questions, we might like to draw upon our UK PRS club meeting which took place in June. Whilst it was felt that there were billions of capital to deploy, the debate centred on getting the right mix of affordable, mid-market and luxury products. Co-Working, Micro and Serviced Apartment products were explored, especially whether they could be built to cost and scale. It was advised that more could be done at a local level through releasing land for development.
Whilst most dream of having a dynamic mix of rental, traditional, affordable, multifamily and a high end residential market, the simple fact remains that while demand is critically high for places to live, investors and developers cannot drive demand and the asset class will remain slow to pick up because the market has no way of testing the revenue growth. The responsibility must lie with governments to take some control and use some form of rent benchmarking and viability testing to help pave the way for a liquid pipeline, PRS will remain a business for the brave and innovative few; not an asset class to the many debt and equity investors waiting to enter into the UK and Irish PRS BTR market.
Conclusions
How many were convinced that this asset class was the ‘next hot ticket?’ Not many, and only those that had experience from US and Germany and ready to deploy into the UK. Why? Presently, it was felt that there is a great unknown of what will happen with the rise in interest rates and impacts on house prices, wage growth and worries over a generic economic downturn; not the best time to chase an asset class rich in illiquidity. Whilst build to rent might help in solving the UK housing shortage and turn a profit, but when we look at other European markets, many agreed a one size fits all strategy could not be applied. If so, what will it take to kick start build to rent investment Europe wide and how far off are we for an institutional asset class?
The discussion on European build to rent will continue during the GRI Residential Europe 2018 taking place on 28-29 November in London.
Further your reading on the Europe’s developing residential market here: Residential capital in Europe: fools game in the late cycle?