Rich investors swoop in as UK squeezes small landlords
EARLIER this year, US private equity firm Harrison Street Real Estate Capital agreed to finance a £300 million (S$514 million) housing development in Birmingham, the UK’s second-largest city.
It’s one of a number of so-called build-to-rent deals happening as investors apply a model that’s long been common in the US. Known as “multifamily housing” across the Atlantic, Savills and Knight Frank predict that it could eventually account for about 30 per cent of UK rentals, equating to more than 1.6 million properties compared with fewer than 100,000 now.
While the sector has established itself in Britain over the past decade, a new shift is happening as interest rates rise to levels not seen since before the 2008 financial crisis.
For one, the surge in borrowing costs means a generation of tenants is being further priced out of buying their own home, creating a supply of desperate customers. In addition, pricier mortgages – along with tougher regulation – are squeezing small landlords, a fragmented group made up mainly of individuals owning perhaps a handful of properties, and many are looking to sell up.
That’s exacerbating a supply-and-demand gap that big investors, from private equity to pensions to sovereign wealth funds, can fill and profit from.
“The pressure on landlords does play into the hands of multifamily investors,” said Andrew Saunderson, who runs CBRE Group’s UK Residential Capital Markets division and also sees growth in the sector. “Long gone are the days where there are any tax incentives to being a buy-to-let investor.”
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Still, the money managers and funds that invest in build-to-rent are not entirely immune from the challenges facing smaller landlords. An inflation surge has pushed up construction costs, from raw materials to wages, meaning investments need to be able to generate bigger yields.
While housing starts have fallen, there is still money pouring in. Investment in purpose-built rental housing topped £2 billion in the first half, according to Savills. At current growth rates, Jones Lang LaSalle projects the sector could have a 10 per cent market share within about a decade, compared with about 1.5 per cent now.
And it’s no wonder: the highest mortgage rates in 15 years are trapping wannabe homeowners in rentals. The share of pensioners renting in England is set to double within a decade, presenting an opportunity for investors to capitalise on an ageing population spending billions of extra pounds on rent each year.
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Among the big names involved are Greystar Real Estate Partners, which has built up at least a £6.5 billion portfolio over the last decade. In late 2022, it and the Abu Dhabi Investment Authority bought a former biscuit factory in south London to develop.
Meanwhile, some small landlords are moving out. Karen Gregory, a 55-year-old landlady who runs her own lettings management business, was forced to sell her rental home in north London this year after her mortgage deal ended, causing her monthly payments to rise from £497 a month to almost £1,900.
“I manage about 30 properties on behalf of other landlords, and I know at least five of those are selling,” Gregory said. “They’ve had enough of the increase in interest rates, regulation and taxes.”
Supply is suffering as a result. The number of rentals available has dropped to a 14-year low, according to consultancy TwentyCi. One of the UK’s biggest buy-to-let lenders, Paragon Banking Group, has flagged weakness in applications from landlords amid rate hikes and volatility in the swaps market, which banks use to price home loans.
Across the river from London’s Canary Wharf, Hong Kong billionaire Henry Cheng has been in negotiations with investors to finance another pair of tower blocks at his Greenwich Peninsula real estate project.
Pension Insurance Corporation – one of Britain’s biggest build-to-rent investors – had been in talks for a £500 million-plus bid recently, but the deal fell through, according to a person familiar with the matter.
Cheng purchased the 150-acre chunk of land in east London a decade ago, with the aim of building more than 15,000 housing units as well as schools and retail space. After tax changes and Brexit shifted the market, the developer switched to rental homes.
Build-to-rent has since emerged as a London construction heavyweight as developers search for new ways to boost revenue during a period of high interest rates. The biggest newly-started housing project in the capital between April and June – an 11-block development on the site of a former Ford Motor car factory in Barking & Dagenham – is expected to see almost a third of its flats turn into build-to-rent, according to researcher Molior London.
The nation’s largest listed developers – traditionally known for building for-sale homes – are also getting involved.
Barratt Developments said over the summer that it was “responding to market conditions by driving revenue through the use of private rental sector sales”. Vistry Group announced on Tuesday (Sep 5) that it will build about 400 rental homes for landlord Grainger in west London.
The BTR sector – which builds flats often kitted with meeting rooms, gyms and swimming pools – is already a heavyweight in the US.
And in the UK, the trend has spread beyond London. Deals outside the capital accounted for 90 per cent of spending in the first half, according to Knight Frank.
In addition to inflation, the other risk for investors may be political. The opposition Labour Party, which is leading in polls, has raised the prospect of restrictions on overseas buyers as it seeks to capitalise on voter frustration with housing policy.
“Most towers in London would not get built if you didn’t get a good amount of pre-sales,” said Helen Gordon, chief executive of Grainger. “One of the best ways to do that is selling to overseas investors.”
Regardless, investors are scaling up the size of their build-to-rent schemes amid the crunch in supply. Projects with planning permission that are yet to be built are set to contain an average of 323 apartments. The average for completed projects is 204 flats, according to Knight Frank.
In the meantime, Britain’s generation of renters continues to expand while the pool of traditional landlords dwindle.
“Investors are willing to work through difficult economic conditions for a slice of build-to-rent,” said Karl Tomusk, associate director for living research at broker JLL. “As potential first-time buyers, renters and small landlords all face a crisis in affordability, institutions are stepping in to plug the gap.” BLOOMBERG
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