Investors in the UK are predicted to put £8.1bn into the build-to-rent sector in 2024.
That was the finding of a survey by Cushman & Wakefield of institutional investors who own a combined 49,000 operational BTR homes and 28,000 pipeline BTR homes, as well as others planning to enter the sector.
Half the respondents have more than 30% of their UK real estate portfolio allocated to BTR for 2024. C&W said this signalled that the UK is home to several main players in the BTR market.
It also reported that the BTR sector saw strong investment in 2023 despite challenging market conditions, with £4.3bn invested, only marginally down from £4.4bn in 2022.
C&W said it expected investment volumes to rise in 2024 as the cost of debt and construction cost inflation eases. Of those surveyed, 13% of investors who currently have no exposure to BTR plan to invest in the market in 2024.
However, the surveyed investors said they would only be bringing forward an additional 28,000 BTR homes in the next few years.
C&W said this was likely to reflect a lack of viable opportunities rather than capital willing to be invested and, therefore, the supply-demand imbalance in the rental sector would not be resolved soon.
The survey also found that 29% of investors plan to dispose of some of their portfolio over the next one-to-three years.
Respondents said the main reason for selling was that the stabilisation/exit strategy had been achieved. These assets are likely to see fierce competition from investors looking to enter the market via stabilised stock.
The trend is already prevalent in Lone Star’s Quintain selling five stabilised assets in its Wembley portfolio to Goldman Sachs and KKR in two separate transactions.
Investors target amenity-light urban schemes
Investors’ have said their top pick for preferred asset type was amenity-light, urban BTR schemes with mid-market rents, with 53% voting these as first choice and 25% voting it as second.
Appetite for this asset class has been driven by lower turnover rates than prime stock, lower operational costs and a larger tenant pool.
Amenity-led urban BTR schemes followed in second place, with 25% voting it as their first choice and 31% voting it as their second choice.
Next was single-family housing, with 19% voting it as their first choice. This asset type is more challenging to gain scale in and has operational challenges, hence its lower levels of interest.
Aside from asset class, sustainability is a key consideration for investors.
Schemes falling short of investor expectations on emissions and net-zero commitments are likely to face reduced appetite.
A BTR scheme with an EPC rating of D or below was the biggest deterrent, with 75% of investors not willing to invest.
This theme continued in their views towards schemes with gas boilers, with 47% not willing to invest.
London locations popular
London Zones 1-3 were the most popular choice for investment, with 41% of the vote.
However, 28% of investors ranked the area last in their choices – when scores were combined, it ranked second last.
C&W said there was divided opinion on the popularity of the centre of the capital.
Comparatively, 19% of investors ranked Zones 4-6 as first choice and the area was the second highest scorer for second choice with 34% of votes.
The second choice for investors was prime regional cities, such as Manchester and Birmingham, with 22% ranking them first choice.
This was supported when investors were asked to name top investment locations for 2024. London was first pick, followed by Bristol, Manchester and Birmingham.
Edinburgh was named fifth most popular city, despite the rent caps introduced in 2022. C&W said this showed that supply/demand imbalance trumps the impact of the regulations.
Breaking barriers to entry
The most prominent barriers to entry for investment in the BTR market are, encouragingly, issues that will likely ease in the next year or two.
These were “cost of finance”, followed by “entry yield” and “unviability of schemes”.
Projections suggested that the latter half of the year would see an easing of the cost of financing when the Bank of England begins to ease monetary policy.
Inflationary pressures were also expected to lessen towards the end of the year.
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