Property specialist SDL Group recently celebrated letting its 2000th new build home in conjunction with Sigma Capital Group. With the Build to Rent sector now firmly established and continuing to demonstrate rapid growth, we have been reviewing some of the challenges that Build to Rent now faces.
There’s no doubt that things are changing when it comes to build to rent. As any sector begins to mature, new challenges invariably emerge on the horizon.
In its infancy, the main priorities for those in Build to Rent were to convince investors of the overall benefits and secure appropriate funding. Of course, the need for funding never goes away but, as it grows and our experience increases, funding appears to be easier to source. SDL is now working in partnerships with several investors who have over £1.5billion to put into the sector over the next three to five years.
The focus has now switched to securing the right investment opportunities (sites) that will deliver the best return, particularly taking into account the increased competition from the growing number entering the sector.
Build to rent PREDICTIONS
As the sector continues to grow, we are expecting some yield compression as competition forces land values up. In our experience, this is being offset through the maturing of the sector, especially due to the success and performance of the initial schemes. Reliable and predictable returns are de-risking this type of investment and allowing investors to take a lower yield.
With any emerging sector, as knowledge and experience grows so does our ability to identify the right opportunities. Over the years, we have found that not only has the size of the developments grown, with many schemes in excess of 100 properties, but we have also expanded our geographical spread. Schemes are now live in areas of the West Midlands, West Yorkshire and South Yorkshire, with positive movement in Birmingham, the Black Country, Telford, Sheffield, Doncaster and Bradford.
Our current investment will build 20,000 homes, still a drop in the ocean as the PRS accounts for over 5 million homes.
In terms of Build To Rent, our investors / clients are focused on mid-density family housing targeting 25-45-year-olds, and increasingly the 45-55 age brackets. These developments are very much a natural progression for those who may have lived in a city centre apartment after university and now crave something a little more suburban.
This part of the Build to Rent market is becoming increasingly attractive for investors as land and opportunities in suburban areas tend not to be as expensive as city centres, which are highly sort after and in high demand for a variety of uses including commercial and student accommodation. In city centres, land is expensive and competition to build the most luxurious and best located apartment block is exceptionally high. Suburban developments also tend to produce less natural churn as renters are normally more settled, whereas younger renters in city centre markets are prone to moving on quickly, leaving investors more vulnerable to a rent shortfall.
So, what’s next for Build to Rent? We certainly all need to be mindful of the impact of legislation over the next few years. Local authorities continue to implement their own rules, which impact on the sector. In Liverpool, for example, the system only allows us to update details for single units rather than entire blocks, which creates a huge financial and admin burden. Eventually, things like this could put investors off.
National changes, including the move towards extended leases and limiting our use of Section 21 for repossession could pose another problem for institutional landlords. As there will always be tenants who are badly-behaved and or don’t pay their rent, managing agents need to be able to move quickly to gain vacant possession to ensure the smooth running of the development and maintain the overall performance of our client’s investments.
In my opinion, the whole housing system needs to be more dynamic. If people are struggling to pay their rent they need options to move into social housing, while those who are already in social housing, but could afford private rental, need support to move.
Although there may be challenges ahead, there are certainly opportunities too. From our own perspective, I can see us moving towards the South East, although land availability and prices will present their own challenges. There is also ample capacity and opportunity in the areas that we are already operating in – our current investment will build over 20,000 properties which sounds like a lot but is still a relative drop in the ocean as the Private Rented Sector accounts for over 5 million houses. In Oldham, for example, where we already have housing, we could easily accommodate up to 500 more units, with demand for homes in parts of northern England being so high.
Overall, the sector has grown at a rapid pace and I, for one, am excited for what the next stage of growth brings.