Build-to-rent investment in the UK totalled £4.3bn in 2022, a record level for four years in a row, according to research by Savills.
Forward funding has been an integral part of BTR expansion in the UK, with 75% of investment in the past five years coming via this route. Almost £900m was deployed to forward-fund developments in Q4 2022 alone, the advisory firm found.
One of the main attractions for investors has been the opportunity to drive value during construction. This is even more important now the spread between BTR yields and the risk-free rate has narrowed.
Polly Simpson, head of multifamily development in the operational capital markets division at Savills, said: “A typical multifamily block will take between two and four years to build and stabilise, and with strong rental growth in the wider market, net operating income can be higher than projected – driving up the yield on cost and widening the premium over the risk-free rate, encouraging investors to commit equity via forward funding.
“We can expect this method of funding to remain popular over the coming year, despite a changed macroeconomic outlook.”
For developers, the wider economic context has made partnering with an investor more attractive owing to the additional security it provides, as well as the lack of alternative development opportunities.
Such forward funding arrangements mean developers avoid the use of expensive debt to finance projects and give them a guaranteed exit on completion at a price agreed before construction begins.
Savills expects BTR to take up a greater share of housing starts in 2023, given developers are now looking at alternative exit strategies to maintain sales rates and de-risk their pipelines.
Simpson added: “Multifamily continues to be very attractive to investors in the current economic climate, given its inflation-matching characteristics and structural headwinds, including increased demand from renters, a supply shortfall and challenges to home ownership.
“Yields have proven resilient in relation to other real estate asset classes, supported by rental growth and strong operational performance.”
Nearly 16,000 BTR homes were started in 2022 across England. However, the total number of BTR homes in planning, under construction or completed increased by 14% in 2022, half of the 28% year-on-year growth the sector has posted since 2017.
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