During our current discussions with real estate debt specialists, talk inevitably turns to the sectors they feel positive about during this time of crisis. Logistics is usually cited first. Those active in the UK also frequently namecheck residential build-to-rent.
Last week, one debt advisor cited BTR as one of the sub-sectors favoured by lenders right now. Post-lockdown, the advisor said, it had received terms for a loan on an operational residential asset with a margin of less than 2.5 percent and a 60 percent loan-to-value ratio. In the view of the advisor, these competitive terms demonstrated an appetite for the sub-sector from debt providers.
Despite the slowdown in overall investment activity as a result of covid, there is a sense of cautious optimism about UK BTR’s ability to recover. Many in the industry expect a quick recovery, with returns robust enough to appeal to institutional investors.
A lack of investment transaction data in this young sub-sector has made some lenders wary in recent years. However, lenders we spoke to this week said they were keen to provide finance. From interviews with market sources and data from reports on the sub-sector, we have identified some of the key factors in UK BTR’s favour.
Rent collection and occupancy rates have held up during lockdown:
Rent collection has remained higher than average across all property types during the crisis. According to a survey by consultancy Knight Frank of institutional investors that own 22,000 BTR units across the UK, 95 percent of the rent due was collected between March and June, compared with an average of below 80 percent across UK commercial property. With uncertainty of income a major concern for lenders, this represents a strong performance.
There is growing confidence among equity investors:
UK BTR had a strong Q1, with more than £1 billion (€1.12 billion) committed according to a July report by CBRE – the highest level on record, according to the consultancy. Before the pandemic, confidence had been returning to the market following uncertainty over Brexit and the general election. Like all sub-sectors, BTR has witnessed a significant downturn in investment. CBRE reported just two deals in Q2, totalling £83 million – almost 90 percent down year-on-year.
However, there is a substantial investment pipeline, with £1.4 billion worth of deals under offer, according to CBRE. A testament to BTR’s strength is that it was among the first sub-sectors for which the Royal Institution of Chartered Surveyors recommended material uncertainty clauses be lifted from valuations.
BTR is supported by strong, long-term fundamentals:
The economic impact of the covid crisis will test the strength of the purpose-built rental property model in the UK, as the government ends its furlough scheme and the recession leads to higher unemployment. However, many of those involved in BTR argue that the model is underpinned by strong fundamentals that are as relevant now as they were pre-covid. There is still a chronic housing shortage in the UK as well as a growing population. And, even during a pandemic, people need to rent.
A rental rebound is expected:
Although rental levels remained broadly stable in Q2, CBRE predicts rents will fall by up to 2 percent this year. The consultancy nevertheless expects a rebound in 2021, and a 2-4 percent increase in 2022.
UK BTR’s performance will be dependent on the extent of the economic fallout from covid and the country’s subsequent recovery. However, amid huge uncertainty for many types of real estate, investors – and, it seems, lenders – still have faith in the sub-sector remaining one of the industry’s growth stories.
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