Investment into operational build-to-rent assets in the UK looks set to exceed £20bn in the next decade, with the market accounting for some 30% of all deal flow in the asset class.
Analysts at Savills say total investment into BTR – including operational assets and development schemes – will rise to more than £12bn per annum. The agency added that although development deals will remain the busiest source of activity, operational deals will account for an increasing share of the market.
Of the £20bn invested across all deal types between 2018 and 2023, just over a fifth was deployed to purchase fully let operational stock. Savills expects this proportion to grow as more opportunities arise to buy stabilised schemes. Between 2024 and 2028, the agency expects investment into operational assets to take up a 25% share of total investment, rising to 30% between 2029 and 2033. The agency’s prediction of £20bn being invested into operational BTR is based on 300 schemes trading at the average value over 10 years.
The UK’s 542 operational schemes are valued at £35bn, which Savills said “is tiny in the context of the wider UK real estate universe”.
Savills said a wider pool of global capital is now unable to or prohibited from undertaking development. “This core and core-plus capital, with lower return requirements, will support the further expansion of the sector by recapitalising investors that have achieved scale through development,” the team said in its Investment in Operational Multifamily 2024 report. “Those investors are then able to pursue further development opportunities, creating yet more rented homes for the sector.”
The £360m invested into operational BTR in the first quarter of 2024 was the highest proportion of investment into operational schemes in any quarter since 2015. Deals included Quintain selling two buildings in Wembley to KKR for around £250m, and selling a trio of blocks to Goldman Sachs Asset Management and Tene Living for £110m.
BTR schemes that have traded have been sold to other investors. Savills said it is not aware of any BTR asset that has been broken up and sold to owner-occupiers, meaning values have been determined by investors’ return requirements and the capitalised value of the income generated by the scheme.
Rental rates soar
Recent market dynamics, in which rents have risen faster than residential sales values, has led the agency to question whether a vacant possession valuation for BTR apartments is still needed. In many regional cities, including Manchester, Birmingham and Edinburgh, rents have grown at more than twice the rate of sales values.
This is even more striking in London, where in many boroughs annual rental growth of 10% has been coupled with sales value growth of just 1-2% per annum since the start of 2021. This has meant that investment values for BTR apartments have held up during a weaker period in the wider housing market.
Savills predicts the sector will start to see wider acceptance of income-driven valuations. It said: “Vacant possession value was clearly a relevant metric in the early stages of the sector’s evolution, where large numbers of apartment schemes were repositioned for the PRS market.
“The rental model was unproven, and funders especially commercial lenders wanted certainty that the values would be achievable if sold on the open market.”
Savills said a shift away from vacant possession valuations entirely is needed to encourage transactions where the investment values exceed equivalent VP values. Investors enhancing the ancillary income on a scheme beyond the rent roll will accelerate the transition. A move towards a more dynamic pricing model, where schemes offer a range of tenancy lengths at different weekly price points, is one way investors are enhancing the gross income position of their schemes.
Savills said: “A wave of equity buyers who aren’t reliant upon debt and focus more on the value of the income stream rather than the break-up value as a backstop would help to shift the dial. Transactions of larger, more heavily amenitised assets will start to establish the precedent of a new valuation methodology.”
Image © Quintain
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