Can build-to-rent thrive in a Brexit-induced slowdown?

If in the wider market gloom is threatening to take hold and some are fearing a sharp slowdown, in the private rented sector (PRS), the mood is very different. Leading PRS players are not just bullish – some even say the sector will benefit from the uncertainty generated by the referendum outcome and any Brexit-induced slowdown. But how valid is this optimism?

Upwards curve

Certainly the PRS has had much to be positive about in recent years, and while other commercial property sectors were beginning to soften in the months leading up the referendum, PRS continued on an upward curve.

Take London, for example. Data from Molior, shared with Property Week, shows that 6,200 PRS units have completed across 71 schemes in London since 2009.

That growth has accelerated in the past 18 months, with construction beginning on 8,500 units in the capital since the start of 2015. In total, 9,800 PRS units are currently under construction across 100 developments, representing 16% of the total of private units under way.

All but three of the 32 London boroughs have seen PRS units constructed. Newham tops the table with 3,300 units either delivered or under construction – 21% of the total housing delivered in the borough.

The PRS is starting to make a significant contribution towards solving the capital’s housing crisis, and it is by no means a London phenomenon. Investment has also been pouring into the regions, particularly the North West, at a steady rate. Manchester has enjoyed a PRS boom, driven by improving infrastructure and business presence, along with an ever-growing graduate population.

Ted Macdougal, development director at developer Forrest, says he expects the market to remain “resilient” post Brexit because of the “significant shortage” of housing in Manchester.

“The success of PRS is going to be one of the key drivers in delivering new homes here,” he says. “The expense of living in London has made staying in Manchester particularly attractive to its large student population after graduating, which is attracting more large employers to the city.”

He cites a number of post-referendum PRS deals. Delph has acquired a site in Manchester, alongside one in Liverpool, as part of its efforts to expand its PRS portfolio. Meanwhile, the joint venture between the owners of Manchester City FC and the city council has submitted a planning application for a 200-apartment PRS scheme.

Forrest is also on site with more than 500 apartments in the city on behalf of X1 Developments. “With Manchester facing a significant shortage of residential stock, the success of the PRS is going to be a key driver in delivering new homes here,” says Macdougal.

So the current outlook is healthy and there has been activity following the EU vote. But will Brexit – as some claim – actually benefit the PRS?

Steady returns

John German, senior director of residential investment at Invesco Real Estate, says the counter-cyclical nature of the PRS means it will continue to attract investors as it is seen as a good way to get steady returns in an uncertain post-referendum market.

“Current uncertainty may create investment opportunities in what we view as a fundamentally sound real estate sector,” German explains. “We continue to see growing interest from [our] global investor base for the forward-funding of PRS projects.”

There are a number of factors contributing to the confidence in the PRS. Firstly, the fundamentals of the residential market remain solid despite the UK’s vote to leave the EU – housing demand simply outstrips supply.

“While immigration levels may reduce post Brexit, and some professionals in London may relocate to mainland Europe, we do not believe this will be in such large quantities to overcome the structural imbalance between supply and demand,” says Mark Bladon, co-head of origination at Investec Structured Property Finance.

Furthermore, economic uncertainty may drive more people in the UK to rent, rather than buy, he says, making the PRS an attractive prospect. That is also driven by a more transient population, who have to move for work often and don’t mind upping sticks and finding a new place to live at short notice.

German says: “Falling home ownership and an increase in the rental sector continues to drive the sector and we believe uncertainty surrounding Brexit is likely to increase the demand for the rental market as potential buyers hold off.”

Overseas interest

The biggest movers since the referendum have been overseas investors looking to take advantage of both a weak pound and the long-term security of the PRS.

“Anecdotally, we are hearing that demand from overseas institutions, particularly from the US, has spiked post Brexit [vote], due to the devaluation of sterling,” Bladon says.

“There is an opportunity to kickstart a process that began in the US some 30 years ago, and which has grown into that country’s huge multi-family sector of today,” adds German, and he would certainly know: Invesco owns more than 30,000 multi-family units in the US.

That US influence may prove crucial. Numerous industry leaders tell Property Week that the other big players in the US market, such as AvalonBay Communities, are looking to move across the pond.

Greystar is one US giant looking to ramp up its UK operations since the Brexit vote. Mark Allnutt, the firm’s managing director of investments and development, says that the current “political change and financial instability” may deter some companies, but the benefits of the PRS are in the long term.

“We believe this model - which has proved itself in overseas markets – can deliver at scale with appeal to a very broad demographic,” he says. “Since economic uncertainty may have a negative influence on house sales, this is likely to drive even more people towards renting.”

UK players

But its not just foreign money that is looking for a home in the UK PRS - UK players are also keen.

M&G Real Estate’s Alex Greaves, head of residential investment, says the sector’s “low correlation with commercial property is likely to serve it well”. “The sector proved its defensive characteristics during the steep market downturns in both the 1990s and 2000s,” he explains. “Pension funds and other long-term institutional investors are very much aware of this.”

With all the positive talk, developers will be licking their lips. Indeed, Essential Living, LIV, Westrock and Moda  - four big PRS investors - say they now hope to ramp up their plans.

“As development activity cools in the wake of the Brexit vote, land prices and construction costs will probably drop, opening up new possibilities for the purpose-built rental sector,” says Martin Bellinger, chief operating officer at Essential Living.

They could also benefit if housebuilders’ step away from the land market, reducing competition for land and therefore making it more affordable. Housebuilders may also look to flog their land if they become worried about a downturn.

Off-market agent Doris Ishack, of DI Properties, tells Property Week she is already seeing interest from PRS developers in buying housebuilders’ land.

The PRS also stands to benefit from the simple fact that it is still a maturing market and has huge growth potential. Research from Currell has found that 76% of the British public had not heard of it. But, tellingly, of those who did understand the PRS, around half said they would be interested in what it had to offer.

However, the sector will have to act quickly to capitalise on the best opportunities, says James Mannix, Knight Frank’s head of residential capital markets. “In 2008, the housebuilders all looked at the PRS but, as soon as they started selling again, they forgot about it,” he says. “I suspect we’ll see the same thing this time around.”

A number of converging factors, not least investor interest, a less competitive land market and strong demand, means the PRS could be set to benefit from a Brexit-induced slowdown, just as other markets soften. But for that to be the case, developers will have to seize the opportunity.

 

Article taken from Property Week (29/07/16)

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