Investment into UK BTR reached £2.7 billion in 2017, up 23 per cent on 2016 and 4 per cent on 2015. It’s a sign of investors’ confidence in the sector that these volumes have held up, despite the headwinds of Brexit uncertainty and a surprise General Election.

But still, the value of BTR stock traded last year is essentially the same as it was five years ago. What happened to the ‘wall of capital’ looking to invest in BTR?

While the value invested hasn’t increased substantially, the type of investors and how they deploy their funds has changed enormously.

Building for the future

In 2014, 87 per cent of deals by GDV were for stabilised, income-producing assets. Last year that proportion was just 27 per cent, as existing investors held onto stock to build platforms upon which to aggregate portfolios.

Just under £2 billion of last year’s investment was in forward funding and forward purchase deals.

This reflects where we are in the development cycle. There simply aren’t enough stabilised assets to meet demand, so investors have turned to funding development of their own stock – betting that strong rental growth prospects and the funding yield discount will compensate them for taking that risk. This has the added benefit in giving them a say in design and branding.

As these assets are let and start generating income, we expect to see more deals. Fully let assets will command a premium to vacant blocks for long income investors, just as we see in commercial property sectors. And there’s also likely to be a premium on larger portfolios where investors can achieve scale quickly, just as we see in the student housing market.

New faces

In 2013, institutional investors had only just entered the scene. M&G, APG, and Legal & General all bought hundreds of units, ploughing just under a billion pounds into the sector.

Since then the range of institutional investors has broadened somewhat, with LaSalle IM, Invesco, and Realstar all funding deals or where possible buying up income producing assets that had accidentally found themselves in the sector.

But some firms are still notable by their absence. Investors such as AXA and Goldman Sachs have shunned the sector so far. Some of the largest owners of multifamily in the US, such as Equity Residential and Essex Property Trust, have yet to be tempted across the Atlantic.

...and who isn't

By contrast, UK registered providers of affordable housing, such as L&Q and A2Dominion are already involved in the sector. Much of their experience developing and managing social rented stock is transferable. Those skills will let them develop portfolios at scale and run them efficiently.

Perhaps the greatest opportunity is for pension funds. A few funds have made their mark on the sector – APG from the Netherlands, for instance.

As we progress through the development cycle and see more stabilised assets brought to market, we can expect to see pensions play a much larger role.

The North-South divide

Net initial yields on BTR deals averaged 4.3 per cent between 2015 and 2017. But that hides substantial regional variation. While half that investment took place in London, where yields averaged 3.8 per cent, across Scotland and the north of England the average yield was 4.9 per cent. In London and the South, the income returns from funding deals are higher than on standing investments, as you might expect. In the North, this is not necessarily the case, given issues over the quality of some of the existing rental stock and the rental covenant attached to it, all limited by the fact that we’re yet to see any of the purpose-built kit trade yet. As investors focus more on the potential growth of the income stream and less on the track record of local house price growth, we expect yields from purpose-built assets to show less regional variation.