The question for real estate investors is whether the same trend will happen in the burgeoning build-to-rent (BTR) sector.
It has become a significant component of the US multi-family dwelling real estate industry, but it has yet to gain real traction in the UK. That could soon change.
It should not be hard to see why. There is a significant demand for attainable family housing in the UK. While the number of homes being built has risen in the past few years, estimates suggest that the UK still has a shortfall of well over 700,000 domestic properties. There is good reason to think that institution-backed quality BTR housing could pick up some of this slack.
In the US, institutional capital has helped to absorb a hefty amount of the demand for new housing stock, with BTR real estate accounting for 40% of all US real estate investment.
The contrast with the UK could not be greater, where a lack of institutional money in this space has helped create the massive shortfall. There are myriad reasons why UK single-family housing lacks funding from professional investors.
For one, too many investors, particularly those from America, equate London with the UK, even though 87% of the population lives outside the capital. The majority of rental demand is in the regions, but most inward investment focuses on ‘aspirational’ real estate in London.
Second, a dearth of institutional-quality operators in the UK means that even if an investor wanted to finance a BTR strategy, there are few companies of a size able to absorb such investment. Small and medium-sized housing developers tend to struggle to attract capital, and therefore achieving scale becomes difficult. This is a circle that is hard to break.
Large financial institutions typically lack the requisite experience to provide a quality service
Simply acquiring large numbers of houses to rent out isn’t necessarily a solution. If banks or other financial institutions buy swathes of housing stock, whether established or newly built, this can present problems for renters. Addressing the housing crisis needs landlords able to professionally and prudently manage properties to meet the expectations of tenants. Big financial institutions typically lack the experience to provide a quality service.
One solution to all this is to grow a BTR portfolio and build rental housing stock, as demonstrated by Placefirst’s vertically integrated business model, acting as a developer, owner and operator of single-family homes.
When Matter Real Estate first invested in Placefirst in 2016, it had completed two projects, comprising 98 units, and was on the verge of finishing a third, with 51 units. Today, the business has 1,500 stabilised units and is on track to reach a projected milestone of 6,500 homes by 2026.
Placefirst doesn’t buy new purpose-built for-sale stock from traditional housebuilders, which can take away opportunities for local homebuyers. Instead, it focuses on providing housing that is built solely for the rental market, either through developing new purpose-built stock or acquiring existing rental housing stock and making significant investments to improve the portfolio and bring it up to a level of quality that makes it attractive for a family looking to rent.
In doing so, Placefirst is creating the scaled portfolio of quality BTR properties that is typically not available to institutional investors.
While we have noticed that there is a small but noticeably growing interest in this end of the market, we expect what is merely a trickle today will become a flood over the coming years.
The signs are already there. A survey published in October by Savills found that in the first nine months of 2021, construction starts on BTR homes outside London reached a new peak of 12,000 properties. More than twice as many schemes began construction outside London than within (43 versus 19).
These numbers are encouraging and likely to grow; there is nothing inherent in the structure of the UK residential market that makes it substantially different from the US. It is likely, therefore, that the growth pattern seen across the Atlantic will be replicated here.
All the ingredients are in place.
The UK has significant pent-up demand, which, when coupled with other factors, such as a lack of competition and the scope for attractive returns, should lead to more and more savvy institutions turning their attention to the single-family BTR market.
There is every reason to think this strategy could become part of the solution for the UK housing crisis, and unlike some other US imports – fast food springs to mind – BTR housing could be a rare example of financial and social value creation being delivered in tandem.
David Christie is chief executive of Matter Real Estate and David Mawson is chief executive of Placefirst