Where are all the build-to-rent Reits?

The views from The Mercian, Birmingham’s tallest residential building, are pretty spectacular. The upper floors of the 42-storey tower, completed by developer Moda in June, offer a panoramic vista comprising the entire city and large swathes of the surrounding West Midlands. A two-bedroom, two-bathroom flat goes for £1,875 a month.

This, by and large, is what the build-to-rent (BTR) market looks like. Over the last decade, property developers typically targeting Britain’s wealthier renters have been erecting towers up and down the country complete with plush furniture, stacks of amenities and – in many cases – premium views.

On the one hand, it is a market which is booming. BTR attracted a record level of investment both last year and in the first half of 2022, and the investment figures look set to keep on growing. On the other hand, many investors remain wary. The sector still attracts just a fraction of the institutional investment which pours into offices and warehouse assets every year, while the number of listed real estate investment trusts (Reits) with significant skin in the BTR game can be counted on one hand.

While Grainger (GRI), Watkin Jones (WTJ) and British Land (BLND) are among the names upping their sector exposure, the only listed property company which specialises in BTR is PRS Reit (PRS). UK Residential Reit was set to join PRS as a pure-play listed BTR developer, but its IPO last year was abandoned after it failed to raise the £150mn it sought. A looming recession and the worsening economic outlook is unlikely to have a positive impact on investors' mindsets, either.

The question, then, is what has attracted so many investors towards BTR – and what has been holding so many others back?

The premise of BTR is simple: developers build homes designed to be rented out rather than bought and collect the rent as income. In the UK, the attraction of BTR comes from both the nation’s rising dependence on rental property, and the fact that the private rented sector is currently dominated by landlords who only own a handful of properties. BTR developers argue there is therefore a demand for a more professionalised approach to rental property that they, with their scale, are able to deliver.

The government has nodded in agreement with this sentiment. Indeed, many in the UK BTR market trace its genesis back to a government report from 2012 which asked why more large businesses and institutions were not invested in the private rented sector. The report concluded that “large-scale developments specifically designed for private rent [...] could deliver real benefits for communities and for tenants, and could also be an attractive investment proposition”, paving the way for a mini UK BTR boom. 

Rocketing BTR, but...

According to data from Savills and the British Property Federation, the number of BTR homes in the UK has rocketed in the decade since – from practical non-existence, a mere “vision” mentioned in the government’s 2012 report, to 74,000 homes as of July this year. The number looks impressive, but Savills says this figure accounts for just 1.5 per cent of all rental housing stock. Still, the agency thinks BTR could become about a third of the UK rental market at full maturity based on the fact that BTR accounts for 47 per cent of the US rental market.

Savills’ head of residential research Lawrence Bowles says the sector has massive potential because demand is seen as robust at a time when retail and office assets look shaky. “You can do your shopping online, you can work from home, but you can’t digitise a bed,” he observes.

However, investor hesitancy remains, and one of the reasons for this is there simply is not much BTR stock for listed players to trade, even if they wanted to. John Cahill, real estate analyst at Stifel, says this illiquidity creates a “cash drag” for potential investment capital. If Supermarket Income Reit (SUPR), he says by way of example, tapped shareholders for money to buy supermarkets, it could spend those funds in a matter of weeks. A BTR Reit could not buy up stock as quickly. What’s more, while a handful of supermarkets or office buildings could be worth hundreds of millions, BTR investors need to own thousands of homes to amass a similar value – making the asset class harder to scale quickly even if stock was available.

Cahill says this means that the listed players who want serious exposure to BTR need to develop the assets themselves, as British Land is doing with its Canada Water development. But this takes time, requires a lot of effort, and capital is not always willing to wait so many years to see returns. Moreover, unlike commercial real estate, housing is a hot-button topic in Westminster. “You have to be wary of government intervention because it is more political than any other type of property,” he says. He also points out that the UK also does not have the land availability of the US, making local and political 'Nimbyism' a bigger issue for BTR than across the Atlantic.

Despite his reservations, Cahill believes that the investor appetite for BTR is there. “If there was [another BTR Reit] in existence, I'm sure people would flock to it," he says. "But it's a question of: How do you start? How do you get out of the blocks?”

One way would be for an existing BTR developer to list – something which senior figures in the sector believe will happen sooner rather than later. For now, though, equity investors wanting a wider range of opportunities like these will just have to wait.