THE WORKMAN PROJECT MANAGEMENT BTR SERIES: 03

BTR: The rules, risks and rewards of investment

Rewind nine years: The 2012 Montague Report is commissioned by government to review institutional investment into the Private Rental Sector / BTR and find out why investors remain wary.

One year later, the ball started rolling: PRUPIM, (now M&G Real Estate), acquired a £105m, 534-unit residential portfolio from the Berkeley Group.

Then in 2015, Rockspring and Atlas Residential purchased a £36m 279-unit development site in Southampton: it was one of the very first regional build-to-rent (BTR) investments in the UK.

Fast forward to 2021 and the snowball effect is clear. BTR is rapidly emerging, not only as a residential heavyweight, but an institutional one too. Though still evolving, it offers enormous growth potential: at just under £100bn today, it is predicted to reach £500bn.

And it’s growth is fast: investment volumes in the sector increased by 58% in the five years to 2019, compared to just 21% for all real estate investment, according to Savills’ Global Living 2020 report.

So how is BTR being funded?

Funding typically comes in three forms, with some degree of overlap between them.

• Direct development: investor buys the site or repurposes an existing one, builds the scheme and takes on all the development risk but does have direct control over the process.
• Forward funding: investor purchases the site and simultaneously enters a Development Funding Agreement with a developer to purchase a defined product for a fixed price with various change mechanics.
• Forward purchase: investor pays a capped amount to a developer to build the scheme, only purchasing the development from the developer on practical completion.

As a rule, investors seek to enter agreements with specialist developers in order to expand their footprint in the sector, but need to achieve their usual institutional standards and risk profiles, which may differ from the usual developer model. In this case, they rely on the expertise of a specialist development monitoring team to strike the balance and build a bridge between institutional risk profile and developer agility.

Where does BTR investment come from?

Sources of private sector investment capital have been highly variable. UK and overseas pension funds, sovereign wealth, private equity, listed and unlisted companies, UK REITs, Far Eastern, Middle Eastern, European and North American investors are all active in the UK market, reflecting its increasing openness to a wide variety of funds.

Many of the large UK funds are already operating in this arena, with more predicted to follow. Legal & General, KKR, Tristan, Hermes, M&G, Threadneedle, Global Mutual, BlackRock, Aberdeen Standard, Goldman Sachs and Invesco are among the most prominent players.

Large non-UK funds have been in the market for some time and are bringing their experiences in the US, Australia and Europe to bear in the UK. While other territories may benefit from plentiful and relatively inexpensive land outside the main city centres, players there such as Greystar, Realstar and Cortland are seeing that some of the urban concepts and techniques are transferrable, aiding their progress in the UK market.

REITs are also being used as tax efficient structures for the delivery of BTR funding. First movers were Sigma and Grainger, and more long-term non-institutional holders of BTR stock may join them.

Are the banks behind BTR?

The BTR sector is a hot topic for the majority of banks operating in UK commercial real estate. Bank funding into BTR is largely at the development through to asset stabilisation stage, including providing development funding to the equity forward funders.

The regulatory capital requirements applicable to banks play into short-medium term lending, so providing development funding, flipping to investment funding, for the asset stabilisation period is the current sweet spot for banks. Four- to seven-year funding is common, according to commercial real estate legal specialists Addleshaw Goddard. The long-term, low-yielding nature of operational BTR assets, however, suits institutional funds and capital markets more than banks.

What’s the outlook?

The pandemic has highlighted BTR’s solid characteristics in economically uncertain times, including rent collection stats of up to 95%, which pose more awkward questions for the majority of other commercial real estate sectors.

As the decade progresses and the need for housing continues to rise, the BTR sector is predicted to snowball further as it continues to attract new entrants, and as investors seek secure, long-term income streams.

By Richard Taylor, Partner, Workman Project Management

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