The evolution of the UK’s nascent Build to Rent sector will continue in 2018 with several factors influencing assets developers deliver, says Jonathon Ivory, UK managing director of Atlas Residential.
2018 is going to be an important year for the UK’s Build to Rent (BtR) sector. As the industry flows into the next stage of its evolution, we’re going to start to see clear winners and losers emerge in the portfolio aggregation arms race.
The total number of investors will begin to consolidate over the course of the year, with investors who have failed to raise sufficient capital to reach the necessary scale starting to think about selling their assets and unwinding their platforms. However, as investor numbers consolidate, the expansion of lenders willing to finance Build to Rent schemes will expand and this will occur against a backdrop of an ever increasing number of international investors seeking to deploy capital into UK Build to Rent sector. At the same time, the changes in Corporation Tax, which have reduced returns for non-resident investors may well begin to rebase land values. Thus, the shape of the sector – particularly in terms of those backing it financially – is going to shift over the year ahead, laying the foundations for its future growth and maturity.
Changes will also occur impact on how Build to Rent is operated. Incumbent property managers who find themselves underperforming are likely to face replacement, as investors seek better and more efficient services from their providers, in an attempt to ensure that operating expenses remain in line with underwriting.
While the investment base is reconfiguring, phase two of BtR will emerge as developers seeking to monetise their value creation will be looking to institutional investors for the first sales of their stabilised, purpose built, multifamily homes. Furthermore, there are signs that we could see the first contractor bankruptcies of this cycle which would create significant fallout, but also opportunity, for developers and investors alike.
In geographic terms, the appetite for London will continue but 2018 will also see increasing investment in the regions, as low yields and continued challenges regarding affordable housing provisions in London work to reshape the locations that Build to Rent investors – and developers – consider viable. Those viability challenges will factor in construction cost inflation, relating to labour shortages, vis a vis the ongoing uncertainty over Brexit and free movement of labour. Equally, the softening of rents in London and Manchester as multiple Build to Rent assets come online at the same time in 2018 and compete for identical market share will also influence the location of future schemes.
Despite the continued proliferation of BtR, UK housebuilders will largely continue their indifference to the asset class for a long as the as the government’s Help to Buy programme remains in place. Regardless, the building blocks of the sector’s future have now been firmly laid, and it remains incumbent on the its practitioners to press on and deliver the homes the nation needs.