The UK build-to-rent debt market needs more data

The pipeline of purpose-built rental housing for the UK has never been fuller. But while institutional equity is bullish, the sector’s lenders need more clarity on market metrics.

It seems the idea of developing purpose-built housing aimed at UK renters is catching on. The number of build-to-rent homes under construction in the UK increased by 40 percent last year, to more than 43,000 units, with another 67,000 in planning, according to data compiled by Savills and commissioned by the British Property Federation.

However, UK BTR remains an untested sector, with only 29,000 completed units. Proponents say it can play a role in solving the country’s housing shortage, although it is difficult to see how high-end city-centre apartment blocks will touch the UK’s need for affordable housing.

BTR is coming regardless and it will find its place within the UK housing market. The first crop of schemes shows the concept is aimed at footloose professionals with good incomes but lacking the savings to buy their own home. Opinion within the real estate industry overwhelmingly concurs there is a market for this. UK planning policy was changed last year to accommodate BTR and institutional investors are ramping up their support; this week, Legal & General announced the forward-funding of two riverside towers in Glasgow, in a latest example of engagement in the sector.

The surge in BTR delivery raises questions about the supply of debt finance to the market. While many lenders tip the sector as a UK growth story, borrowers so far have met with a less than liquid debt market for such schemes. Many have sourced finance from those lenders pursuing higher-risk-return strategies, with pricing leaving limited headroom for their costs. For an efficient lending market to emerge, lenders need more operational data about the performance of BTR assets.

Putting finance against for-rent housing schemes can be a challenge for lenders. While financing for-sale schemes requires development finance and a tail period while flats are sold, it is difficult for lenders to underwrite the stabilisation of rental schemes. With BTR often forward-funded, lenders are required to take a view upfront on whether they agree with the end-value of a scheme and decide where to set the loan-to-value.

In a market with a lack of sales of completed and operational BTR properties, lenders remain in the dark as to how institutional buyers of schemes will value the income streams they produce and what level of yield they will be prepared to buy at. Lenders also lack insight into sustainable levels of rent. As one lender recently said, there are only a handful of purpose-built private rented schemes in existence in the UK which have been operating for more than a year. Comparable data on income is therefore lacking.

By contrast, the US multifamily market, established for decades and boasting 14.6 million units according to CBRE, benefits from a liquid debt market including banks, insurers and CMBS, with government agencies also supporting the sector.

The UK BTR market is nascent, but there is clearly huge investor appetite. Debt will follow, but lenders need to see developers and investors deliver the right amount of stock in the right places, rented at the right price point, before they can become comfortable with the risk. Until then, it will be left to the bolder lenders to finance the pioneering wave of UK BTR.

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