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Investors swoop on British build-to-rent sector

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Traditional UK house builders are struggling due to a slowdown in European growth and homebuyers holding out for further price falls as the nation faces uncertainty over plans to exit the EU.

London

PROPERTY firms are turning to Britain's budding build-to-rent sector, which caters to students and city dwellers seeking affordable accommodation, as traditional home building and selling falters on weak consumer confidence.

US real estate firm CBRE Group Inc said it had agreed to buy British property developer Telford Homes for about £267 million (S$455 million), in a deal representing a premium of about 11 per cent to Telford's closing price.

In a separate deal announced on Wednesday, student housing provider Unite said it would buy rival Liberty Living Group for £1.4 billion.

Established in 2000, Telford has focused on London, building housing blocks in up-and-coming outer areas of the capital such as Stratford, Bow or Finsbury Park.

"The UK is in the early stages of a secular shift towards institutionally-owned urban rental housing, similar to what we have seen in the US over the last two decades," CBRE's chief executive officer Bob Sulentie said in a statement.

Traditional UK house builders and developers have been struggling due to a slowdown in European growth and homebuyers holding out for further falls in house prices as the country faces uncertainty over plans to leave the European Union.

At the same time, demand for rental property is rising, according to Britain's Royal Institution of Chartered Surveyors, as the amount of rental stock falls, with tax and legislation changes deterring would-be landlords and prompting small-scale landlords to sell up.

This has left room in the market for large players looking to capitalise on rising rents.

Schroders, which has a 2.88 per cent stake in Telford according to Refinitiv data, said in a report last month that investors were being pushed to consider investment opportunities in alternative, non-mainstream sectors.

But the asset management firm's head of real estate capital, Robin Hubbard, cautioned that segments like student accommodation and build-to-rent residential had already seen significant interest from institutional investors and yields had compressed as they had become mainstream.

In May, Telford reported a nearly 13 per cent drop in annual profit for its fiscal 2019 as it sought to navigate a Brexit-dampened London housing market with an increased focus on low-risk, build-to-rent properties.

"The difficult properties to sell have been the very expensive ones. I think a bit of the bottom is falling out of that market. A lot of their buyers were from overseas and with Brexit, that's creating a little bit of uncertainty," said Paul Mumford, fund manager at Cavendish Investment Management and the ninth-largest shareholder in Telford Homes.

"Telford has decided they would prefer to do a less risky business than the business of building blocks to sell, and they have gone into partnerships in order to build to rent."

CBRE has said its offer price is final, but that it reserves the right to raise it if another offer is made for Telford. Telford's directors have recommended the offer.

Mr Mumford said: "At the moment, we are undecided what to do but it looks as though possibly one should be waiting to see whether there is a higher offer."

Aynsley Lammin, an analyst at Canaccord Genuity, said: "I don't think any of the other UK house builders will be coming in to make a bid. It's quite a specific area of the market and so would require somebody who is already involved in the build-to-rent market and has the equity and skill base to manage these properties as well as develop them."

In 2015-16, there were 2.3 million students at British higher education institutions, roughly the same figure as a decade before, according to the universities' representative body Universities UK, although the proportion of international students had risen from 14 per cent to 19 per cent over the same period. REUTERS