CREFC launches build-to-rent finance working group

A working group of financiers and investors active in the UK build-to-rent residential sector has been assembled by industry body the Commercial Real Estate Finance Council (CREFC) Europe in a bid to promote greater awareness of the challenges of financing the fledgling sector.

The group includes figures from lenders including pbb Deutsche Pfandbriefbank and Wells Fargo – banks which have lent to the UK private rented sector – as well as developers including Apache Capital Partners and Greystar.

CREFC Europe’s chief executive Peter Cosmetatos said the focus needs to be on driving credit availability, with bank lending and development being directly impacted by the way buildings are valued by lenders’ surveyors.

Cosmetatos told Real Estate Capital that rather than the traditional residential development space, which can deliver units for either rent or sale in a single building, or the burgeoning institutional private rented sector, in which leverage is not typically required, the focus of the working group will be on the premium purpose-built part of the market.

Such schemes are typically delivered by developers supported by debt finance. Product has, up to this point, been concentrated in London and city centres including Manchester and schemes tend to contain ancillary facilities including gyms.

“The goal is to make sure that a lack of understanding of the sector among credit providers is not a barrier to its development,” said Cosmetatos. “The type of development we are focussed on is premium product, so it will only go so far to address the market’s affordability issue, but it does have the capacity to change the way in which rental property is viewed.”

“As a relatively new sector, financial modelling can be difficult for lenders due to the lack of comparables in the market,” Cosmetatos added. “There are issues around how to value schemes, and how to take into account allowances for repair and maintenance, for instance. There is no standardised framework for assessing schemes.”

The group’s aim is to develop standardised assumptions, definitions and metrics for the BTR sector, including recommended approaches to deducting operating expenses from gross rental income, in order to make it easier for lenders to compare schemes like-for-like. Valuation is particular topic for discussion.

The panel will meet for a discussion on 5 April, hosted by law firm Ropes & Gray. The seminar will include Lee Franklin of NatWest, Asis Dey of pbb Deutsche Pfandbriefbank, Stacey Flor of Wells Fargo, Ciaran Singh of DRC, Richard Jackson of Apache Capital Partners and Michela Hancock of Greystar.

“While many institutional investors are forward-funding build-to-rent developments, or bulk buying properties from house builders using equity, many others will be reliant on debt funding. Clearly, without the nominations agreements you’d find in student housing this essentially amounts to speculative development,” said Carol Hopper, partner at Ropes & Gray. “Lenders are clearly getting more comfortable with build to rent, but issues around income valuation, the role of amenity spaces and complications thrown up by covenants and warranties all need ironing out.”

The build-to-rent/purpose built private rented sector is a relatively new sector in the UK market, with most investors entering in the last five years. The sector featured within the government’s recent housing white paper, with ministers encouraging institutional investment in the private rented sector and hailing the sector as an element of its plan to build a million new homes by 2020.

While there have been high profile deals in recent months, such as Deutsche Pfandbriefbank’s £85m financing of Apache Capital & Moda Living’s Manchester Angel Gardens scheme, many lenders still consider BTR akin to traditional lettings, which causes difficulties in valuation.

Richard Jackson, co-founder and managing director of Apache Capital Partners, said that when the firm was seeking finance for Angel Gardens it saw increased demand from banks and alternative lenders including debt funds. “Due to the early stage of the sector, the banking environment continues to evolve, including number of entrants, pricing and underwriting principles, and this market will continue to grow,” added Jackson.

“For BTR to evolve, the approach of valuers and lenders needs to improve. Both parties need to work together, with developers and other stakeholders, to define standards and build momentum to support the growth of the sector,” said Michela Hancock, development director at Greystar Holdings.

“While we have been active in the sector, with notable deals such as Essential Living’s Creekside Wharf scheme, there are a number of challenges faced both by lenders and investors,” added Lee Franklin, head of structured lending – real estate finance at NatWest.