It is no secret that private sales rates on housebuilder’s sites have slowed since last summer. No longer supported by Help to Buy and ultra-low mortgage rates, housebuilder trading statements show that average sales rates nationally have been c.0.5 sales per outlet per week in 2023 (Jan-Nov). This is broadly in line with our estimations of a typical sales rate of 0.55-0.6 per outlet per week without Help to Buy.  

The weaker private sales rates reported for July and August ranging from 0.25 to 0.41 sales per outlet per week is partly due to the unexpected additional increases in the cost of debt during June and July. These sales rates are significantly down on the peak of 0.8 per outlet week in early 2022.  Developers increasingly need to turn to alternative tenures to maintain the pace of delivery, particularly on larger sites. 

Is Build to rent an option?

One option is to consider Single Family Housing (SFH). Also known as Build to Rent Houses, the homes are delivered for market rent and held by institutional investors for the long-term. A little over 10,000 homes have been delivered to date but there is huge investor appetite to deploy capital into the sector. According to our 2023 Single Family Housing Investor Survey, 80% of investors are targeting portfolios of 2,500 homes or more. To meet this demand, investors hope to leverage the expertise of existing housebuilders.

In our survey, the size of operational SFH portfolios varied significantly between different investors, from less than 100 units to over 5,000 units. More than half (53%) of investors are looking to scale up to 2,500 homes within the next five years, with a more than a third (37%) looking to achieve this scale within the next 10 years.

In the first 11 months of 2023, investors have funded a pipeline of nearly 3,500 homes for UK housebuilders, more than in the 5 previous years combined. Citra Living and Barratt announced a forward funding deal to deliver 600 homes (value £168m) in Q2 2023. Vistry have also announced a partnership with Leaf Living (backed by Blackstone) in November 2023 for delivery of over 1,500 homes. As shown in the chart below, the number of Single Family homes funded by investors so far in 2023 is more than three times the previous record levels. 

Although little comprehensive evidence is available on the speed of letting up rates on Single Family Housing schemes, there are individual case studies which demonstrate the acceleration benefits SFH can provide. For example, at Bilston Urban Village in Wolverhampton, 420 homes were absorbed into the local market in just over two years, with the units split into 46% private sale, 25% affordable, and 29% private rent. The 122 SFH homes were delivered over a 9 month period, with the only limiting factor being the pace of construction, not the rate of letting. Including Single Family Housing as part of a multi-tenure approach can lead to more efficient rates of market absorption and enable developers to achieve a faster return on capital than would be possible through just open market sale. 

Which markets?

The majority of single family housing to date has been delivered in the North West and the Midlands. These markets typically offered a lower cost of entry, and a higher rental yield than the more expensive markets in the South. 74% of investment to date has been in markets with an upper quartile £ per square foot value of under £400. 

However, the pipeline has been expanding recently to more affluent markets, such as commuter locations in Essex, Buckinghamshire and Hampshire. In these markets, strong rental growth, averaging over 8% per year for the last two years, has enabled investor bids to be increasingly competitive against the slowing open market sale route. But despite this new potential, the majority of activity is still concentrated in the £300 to £400 per square foot price band, covering most of the Midlands, East Anglia and parts of the South West.  

Scale and structure

From survey work and interviews in Autumn 2023, we have established that institutional investors are typically seeking parcels of 100-150 homes, in order to achieve adequate scale leading to management efficiencies. Investors will occasionally consider smaller parcels, but the minimum number of homes would be around 50. On large mixed tenure sites, institutionally funded private rented homes comprise between 20% and 40% of the total delivery.  

On larger sites (500+ units), there should be a place for Single Family Housing with significant upside to housebuilder’s return on capital employed on infrastructure and placemaking. The rental units will be completed quickly, establishing occupation and scale, and supporting commercial occupiers on the site. In these types of sites, the most effective model is where the investor is involved from a very early stage, ideally before planning and land acquisition, reducing the need to retrospectively alter planning consents or land deals to reflect a change of tenure.

Housing type

To attract institutional investors, it is also essential that developers understand the type and specification of homes that the sector needs. According to our Single Family Housing Investor Survey the average investor’s preferred unit mix is 37% 2 bedroom and 48% 3 bedroom homes. Under 10% of the requirement is for larger 4 bedroom properties.

Institutional investors also have high ESG requirements, that ideally need to be planned in from the start of construction. Some respondents to our survey will for example, only bid on sites that solely use electricity, not gas. Investors also highlighted the need for information on carbon emissions and energy usage to help them assess the suitability of different schemes. 90% of investors surveyed are targeting at least an EPC B across their rental portfolios, and 20% aim to achieve A ratings across their entire portfolios. Developers who are designing for high standards of energy efficiency and can provide evidence of the sustainability performance of their homes are most likely to attract interest from investors. 

Conclusions

Attracting Single Family Housing investors can strongly contribute to maintaining or increasing delivery rates, particularly in a weaker sales market. There is a high level of demand for purpose built rental stock, but housebuilders need to be aware of the specific requirements of investors. Sites that are most attractive to investors are those which have high sustainability credentials, and where parcels of 100-150 two and three bedroom homes can be carved out for rental stock. For the larger, more complex sites, a partnership approach will be most effective, ensuring the GDV of purpose built rental units can be reflected in both the price agreed for land purchases, and in viability negotiations with planning authorities. 

Further Information

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