London BTR Study Tour: June 2024

Navigating the Shifting Landscape of Build to Rent

The Build to Rent (BTR) market is undergoing significant transformation. As we navigate these changes, Franklin St. is committed to staying ahead of trends and understanding the dynamics that will shape the future. Our recent study tour to London and participation in the 2024 Bisnow BTR Annual Conference at Canary Wharf provided valuable insights into the current state of the market and the strategies necessary for success.

 

The London BTR Market: Challenges and Opportunities

The London BTR market presents a mixed bag of challenges and opportunities. Key themes from our study tour & BTRAC highlight the complexities of operating in this space. Higher hurdle rates, high supply levels in areas, extended lease-up periods, and elevated build costs are prevalent issues. These factors contribute to a competitive and challenging environment for developers and investors alike.

Despite these hurdles, the potential for growth remains. As one industry expert noted, “The fundamentals in residential for rent are unbelievably strong.” This sentiment underscores the enduring demand for rental properties, even in a difficult market. However, adapting to these conditions requires strategic adjustments and a forward-thinking approach.

In contrast to the Australian market, the Bank of England cash rate is currently at 5.25%, and housing supply is at a different juncture, largely due to Australia’s unprecedented population growth. This economic backdrop adds an additional layer of complexity to the London market, influencing investment decisions and development timelines.

 

BTR Evolution: Embracing New Models and Sectors

A significant theme in London was the shift towards new models to maximize returns, both in operations & deal structuring. While short-term rentals offer higher yield opportunities and shorter lease-up periods, the broader trend is towards flexibility and innovation in property management. This approach includes enhancing resident experiences and integrating technology to streamline operations and improve tenant satisfaction.

Additionally, the conference highlighted a general pivot towards alternative sectors, such as living and storage. This shift is driven by macro capital movements away from traditional real estate investments. As one speaker put it, “A lot of capital is not yet ready to get in but is very close.” Concerns with redemption queues and having to wait to be able to shift investments toward residential are prominent. This capital will likely flow into BTR as economic conditions stabilize, creating long-term growth opportunities.

 

The Role of Government and Regulation

Government support and regulation play crucial roles in shaping the UK BTR landscape. Favourable debt pieces from local governments and initiatives to promote affordable housing are pivotal. However, the regulatory environment remains a significant risk factor. As noted during the conference, “Regulation and fire safety, among other factors, are killing gross to net leakage.”

A notable regulatory change in the UK is the introduction of new laws requiring dual fire stairs in tall residential buildings. This regulation aims to enhance safety but also impacts the design and cost of BTR projects significantly.  It’s crucial that policy changes in Australia are clear and attainable.  Where we already have a high quality of construction, we will continue to advocate for policies that support the growth and sustainability of the BTR sector.

 

Single Family Rentals: A Growing Segment

Single Family Rentals (SFR) emerged as a promising segment within the BTR market. With 11,500 SFR homes and a pipeline of 22,000, this sector is gaining traction (BTRAC). The demographic trends are also favourable, with 40% of occupants being couples and occupancy rates over 90% (BTRAC).

The SFR market offers several advantages, including increased tenant stickiness and viability in lower rent areas. Notably, tenant retention improves with the number of bedrooms, suggesting a preference for larger living spaces. Furthermore, the focus on ESG (Environmental, Social, and Governance) initiatives, such as incorporating heat pumps, batteries, and insulation, aligns with broader sustainability goals and enhances property appeal. SFR is poised to be a major part of the Australian market in the medium term, driven by similar demographic trends and demand for suburban living.