This article was published through Development Finance Today in October 2024
In recent years, the build-to-rent (BTR) market has navigated economic and wider industry challenges with notable resilience, so much so that Knight Frank expects it to grow to £126bn in the UK by 2028.
However, this does not mean that BTR is immune to the impacts of market dynamics, and effective management is key to avoiding delays to funding decisions, project starts, and completions, to ensure a thriving sector that lives up to its potential.
In its recent BTR market update, Savills highlights that Q1 2024 was the slowest first quarter for a decade while, according to a JLL report, total BTR investment in 2023 was down 20% year-on-year, with below-median deal sizes.
Investors still face pressures this year, especially given that, as noted by CBRE, many will need to consider refinancing existing loans that were arranged in different market conditions.
Additionally, new building safety regulations for high-rise residential buildings created some project uncertainties.
This means that an air of caution remains despite an improving macro landscape including stabilising inflation, lower interest rates (albeit still higher than three to five - years ago), rising property investment yields and the cost of borrowing starting to come down from last year’s highs.
For these reasons, and in our experience, investors and developers are keen to mitigate risk and ascertain project viability more accurately.
This is reflected in the greater diversification happening within BTR, as attention is turning to the burgeoning single-family housing (SFH) segment – accounting for 42% of BTR investment in 2023, according to the abovementioned JLL research.
Nevertheless, for the bubble not to burst, a thoughtful approach is needed for SFH schemes to achieve the necessary value to make them viable, by opting for the right locations and other factors. Rigorous due diligence is also required to better identify and manage risks throughout projects, and we are seeing it undertaken much earlier in the process.
For high-rise, urban developments, the importance of due diligence is further underpinned by the impact of evolving legislation like the Building Safety Act.
This is not only in terms of navigating the second stairway requirement, but also the significant shortage of registered inspectors.
The latter is an industry concern acknowledged by the Health and Safety Executive and a major potential bottleneck for sites, requiring careful management from the outset for viable projects.
Viability relates to the cost of debt too, whereby we are seeing forward funding schemes becoming less popular than forward commit schemes with clients who want to avoid paying interest on loans throughout the build. However, this does not suit developers who rely on capital to pay for the works – a disconnect that needs to be addressed.
Focusing on financial covenant strength, as well as the robustness of contractors and their supply chains, should also be top of the agenda.
After all, construction was one of the top industries experiencing insolvency (4,401 companies) in the year to April 2024.
It is worth considering various procurement and financing routes, and this is where I believe the JV model is an attractive proposition that can accelerate procurement while sharing both the risks and profits among parties, unlocking more BTR projects.
In the future, as BTR continues to be embraced by investors, funders, developers and wider property stakeholders, there is greater scope for ESG too.
In my opinion, the BTR sector is ahead of the curve for sustainability and social value, which in turn is then more appealing to funders and investors while strengthening viability, leading to fewer vacancies and higher asset values.
For these reasons and more, I also hope to see the sector benefit from the newly elected government recognising BTR’s meaningful place in the country’s housing mix.
Looking ahead, the need for BTR will remain and the bubble does not need to burst if projects are approached effectively from the outset to capture the market’s tremendous opportunities.