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Lessons from across the pond hint at scale of build to rent’s UK potential

Paul Stockwell Gatehouse Bank

Paul Stockwell (pictured) chief commercial officer of Gatehouse Bank

Coffee chains, CrossFit and co-working spaces have one common denominator — they all started life in the US and have been rapidly adopted by the UK.

As so often happens, the US leads the way.

This is largely thanks to the size of its market and its position as one of the most developed economies in the world.

And it’s also true in the property sphere.

Business is booming in the UK’s build to rent sector, where there are 148,046 properties already delivered, under construction or in planning as of October 2019.

This is a 20% jump compared to the same period in 2018.

Investment funding is also flooding in with £70bn expected to be injected into the sector between now and 2022.

Despite this climb in activity, it is what has happened in the US that shows us that the UK still has much ground to cover.

By contrast, in the States, build to rent as an asset class has long been established, through both the apartment block investment strategy, known as multi-family housing, which provides more than 330,000 apartments a year, and the single family housing model, where the likes of Colony, Starwood and Blackstone have invested heavily.

The US’ approach to build to rent has not remained static, catering for both families and young professionals, and thus providing diversification to their investors within the build to Rent Asset Class.

Once again, like the coffee shops, CrossFit and co-working spaces, the UK is now starting to follow suit, and rightly so.

To date, the vast majority of build to rent investments in the UK focus on multi-apartment towers, which often come with desirable extras include gyms, cinema rooms, concierge and communal lounges to cater to the Millennial market.

However, Gatehouse Bank is focusing on the suburban single-family housing model.

These portfolios are situated in locations that have a village feel and less density in areas where this type of family accommodation is in high demand.

Those aged 25 to 44 are playing a large part in creating that market.

Among 25 to 34-year-olds, participation in the rental market has risen from 28% in 2007 to 2008 to 44% in 2017 to 20184.

There are also more 35 to 44-year-olds renting in the private sector, rising from 13% in 2007 to 2008 to 28% over the same period.

There are multiple reasons for this, including affordability challenges as full-time workers can expect to pay 7.8 times their earnings (on average) to buy a home in the UK.

However, it is also the case that this group, who were used to renting throughout their 20s, enjoy the flexibility it brings.

There has been a generational shift in attitudes towards renting well into adult life.

Single family build to rent homes as a segment of the build to rent asset class is the next big growth area in the UK property sector, in our view.

It also provides a way of increasing the supply of houses at a time when overall building in the UK remains stagnant, and unable to keep up with the pent-up demand, which has been created as a result of decades of under supply.

This model can provide institutional investors with a long-dated, resilient, and inflation indexed stable income stream underpinned by favourable supply/demand dynamics and a defensive asset class in UK residential.

A tenant renting a flat may only intend to live there for a few years and meeting a new partner or having children could induce them to move.

But in family housing, tenants are more likely to be setting themselves up for a permanent residence, and, once any children are in school, many will be reluctant to move away.

Thus, the single-family housing model is less susceptible to churn as a result of high levels of turnover, and so exhibits resilient and defensive characteristics.

Furthermore, apartment blocks are operationally intensive, and therefore expensive with high overheads, stemming from staffing costs such as concierge facilities, and amenities such as gyms and cinema rooms.

The single-family housing model provides new top quality, housing, and a professionally managed service but without the increasing levels of amenities that are seen in the multi-family space, and it’s therefore more operationally efficient.

The long-term sustainability of stand-alone family homes in the build to rent market makes it an ideal venture for Gatehouse Bank which, alongside Sigma Capital, are the only providers currently doing this.

We expect to see more investment flowing into this market in the coming years as a solid track record promotes investor confidence.

With the emphasis in the UK now on creating new communities on the fringes of major towns and cities, this way of delivering more family homes is poised to come into its own — just another trend among many inspired by successful beginnings in the US.

 

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