Resilience of the sector

In spite of the challenges 2020 has presented, the UK Build to Rent (BTR) sector continues to provide resilient income returns. Occupancy levels remain high and rent collection rates are still robust, in contrast to many other real estate sectors.

Little wonder, then, that investor appetite and pricing for BTR assets have stayed strong through 2020. The third quarter of 2020 was the strongest single quarter of activity on record, with £1.84 billion invested.

Resilient residential

BTR investors have reported robust occupancy levels over the last two quarters. Legal & General Investment Management initially reported a 9% occupancy fall in June as overseas students returned home, but occupancy has since recovered. Grainger’s occupancy was 95% in the year to September 2020.

Rent collection has remained resilient too. Savills Residential Management team collected 97% of rents due in Q3 from the more than 3,000 homes they manage. Grainger collected 95% of its rents in September, and even reported annual rental growth of 2.5%. PRS REIT recorded a 100% rent collection rate in the three months to September. This compares exceptionally well to other real estate sectors, some of which are dealing with rent collection rates well under 50%.

That resilience has supported pricing in BTR even as yields in other sectors soften. Net initial yields for operational BTR stock continued to narrow in all major markets in the first three quarters of 2020. As the sector continues to mature, greater liquidity and economies of scale will put downward pressure on BTR’s risk premium – allowing yields to remain stable even as the risk-free rate rises.

This stability in the face of pandemic disruption has reinforced BTR’s huge appeal to investors seeking long-term, reliable returns. £3,097 million was invested in BTR in the year to September 2020, 4.6% more than in the whole 2019 calendar year.

Inevitably the pandemic caused a degree of disruption to the sector. Lockdown restrictions limited developers’ ability to make construction progress and forward funding transactions required additional discussions on items like Extensions of Time due to pandemic induced delays. However, activity returned rapidly in the third quarter, with £1,836 million invested in just three months – the strongest quarter of BTR investment on record.

The strongest quarters for UK BTR investment

Investor appetite for BTR assets continues to grow worldwide. Data from Preqin shows investment fund capital targeting residential assets grew from US$16.4 billion in 2016 to US$26.3 billion in 2020. The significant appetite from balance sheet investors with their own equity, as well as a variety of other investor types, means that the total number is far greater still. For more detail on international residential investment, see our recent report: Global Living 2020.

Fresh blood

Another sign that BTR’s appeal is continuing to grow is the widening pool of investors entering the sector. Over a third, 35%, of investment in the first three quarters of 2020 came from investors that were new to UK BTR including AXA IM (Dolphin Square, London), Pension Insurance Corporation (New Victoria, Manchester), and ECE (Dandara portfolio, various). That is almost double the number of new capital sources compared to 2018, 20%.

In our 2018 report, Investing in Private Rent, we predicted that the investors who will dominate the BTR market of the future haven’t yet made their first step into the sector. We believe this prediction is still true. As the range and scale of BTR opportunities on offer grows, so too does the pool of investors looking to access the market.

_{Read the other articles within Spotlight: The UK Private Rented Sector below}