Lending principles for the UK built-to-rent sector are essential

As the UK’s purpose-built private rented residential sector grows, lenders need guidelines for financing schemes, writes Peter Cosmetatos, CEO of the Commercial Real Estate Finance Council Europe.

Peter Cosmetatos

Over the last few months, there has been a lot of media coverage of a diverse range of new build-to-rent residential deals and products in the UK market, capped by the joint venture between Invesco and BTL provider Platform; the UK’s first institutional private rented sector portfolio trade. CREFC Europe’s decision to launch a BTR finance initiative earlier this year was intended to address the issues surrounding the provision of debt finance to this burgeoning sector.

So far, we have assembled a working group of industry specialists and hosted one seminar; one of our best attended, with strong interest from various parts of government as well as lenders, sponsors and advisors. A picture is emerging about the areas where our initiative could support the market.

The government angle is important, because the BTR sector has needed not only clarity and consistency, but also concrete help from policymakers to get off the ground. Nine years ago, the first major policy paper I wrote in my previous job at the British Property Federation addressed what the government should do to promote residential REITs. This has been a long time coming, but it does now seem that the need for government support is reducing as the market embraces BTR with growing confidence.

As the trade association that represents the lending community, it is not CREFC Europe’s role to address the lack of data, comparables and relevant sponsor track records that many lenders have highlighted as current challenges. All of those will gradually fix themselves as the sector grows over the next few years. Also, others are better placed to tackle planning issues and to develop suitable solutions for valuing residential property that is fundamentally a rental product.

The key areas on which CREFC Europe’s
initiative will focus are:

  • Educating lenders about BTR generally.
    There are many different BTR models out there, so sweeping statements are risky, but as a rule, purpose-built PRS should be seen an operating business rather than traditional property investment. Exit strategies also need to be seen in this light. For example, private sales with vacant possession may not be an option where a scheme is based on providing high quality shared facilities and amenities to tenants in return for a rental premium.
  • Highlighting premium product. There is a lot more going on than the amenity-rich schemes being developed by the likes of Greystar, Quintain, Essential Living and Moda/Apache, but this premium part of the market is likely to be our main focus. Unlike many smaller, private schemes that are more opportunistic and agnostic as regards the choice between private sale and rental, these schemes are truly purpose-built for rent. At the same time, they differ from some of the more straightforwardly institutional schemes in that they require significant debt alongside the equity.
  • Establishing guidelines. BTR is a new sector for the UK. It is different from other UK sectors, and the UK market is different from other countries where the product is well established. Those with experience lending against hotels or student accommodation in the UK, or against multifamily assets in the US or continental Europe will naturally use that experience as a good starting point – but these are not perfect proxies. Different market participants might benefit from guidelines, such as those we have produced in relation to intercreditor agreements, explaining the issues and the perspectives of different transaction parties.
  • Helping standardise terminology and definitions. Until the UK’s BTR market is well established, different market participants are likely to use key terms inconsistently. For example, if there is no consistency in how income and expenditure items are defined and dealt with, how can lenders safely compare financial models across different schemes? Developing recommended definitions and standards in this area would help.

The task now is for the lending community to play its part in delivering the finance that the UK’s BTR sector needs in order to flourish.