Build to Rent (BtR) remains one of the most in-demand UK real estate sectors, receiving £4.3 billion of investment* in 2022, according to global real estate advisory firm Savills.
“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,” comments Polly Simpson, Head of Multifamily Development in the Operational Capital Markets division at Savills.
“Yields have proven resilient in relation to other real estate asset classes, supported by rental growth and strong operational performance. Those who have already invested in Multifamily over the last few years have enjoyed rising rents, high occupancy and record lease up rates, which has more than compensated for higher costs across their business.”
Sustained demand for Multifamily investment to carry through to 2023
Savills latest Investor Sentiment Survey in Q3 2022 revealed that nearly two-thirds of European investors are likely to invest in UK Multifamily in the next 12 months.
Demand has been driven by a strong UK rental market, characterised by consistent rental growth and underpinned by a shortage of rental homes relative to demand. In the latest RICS sentiment survey, a net balance of +43% respondents reported rising tenant demand in January 2022, above the 2017-19 average (+10%).
“Yields softened as a result of the market uncertainty during the second half of 2022. But, strong rental growth has meant that this has not fed through to capital value falls. As we move into 2023, investors will be looking to see increased liquidity in the market, which will help them firm up fair market pricing,” comments Guy Whittaker, Head of Build to Rent Research, Savills.
“Investors will also be keeping an eye on rental growth and what is happening to the long term risk free rate over the coming months. Savills expects rental growth to continue and have forecast 6.5% rental growth in 2023. With legacy deals closing and new opportunities coming to the market, we do expect to see a rise in investor confidence as we continue through Q1.”
Forward funding will remain the primary route to market
Forward funding has been an integral part of Multifamily expansion in the UK, with 75% of investment in the past five years coming via this route. Nearly £900m was deployed to forward fund developments in Q4 2022 alone, says Savills.
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 Multifamily yields and the risk-free rate has narrowed.
“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 (NOI) 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,” continued Polly Simpson.
A landmark transaction in Q4 2022 was PIC’s forward funding agreement for One Eastside in Birmingham, where Savills advised. The c.£200m investment will fund the construction of 667 Multifamily apartments in what will become the tallest Build to Rent tower outside of London, pointing to continued confidence in city centre investment and the ambition of investors to scale UK platforms quickly.
The outlook for investors and developers
The elevated cost of debt remains a challenge for investors – having nearly doubled over a typical five year period. This means highly leveraged investors are unlikely to be able to generate the same cash-on-cash returns as a year ago, leading some parties to temporarily pause acquisition activity. But, this presents an opportunity for less geared investors to take advantage of reduced competition and secure the highest quality assets.
According to Savills, 80% of UK Multifamily investment has come from just 36 investors to date, of which many are ungeared or lowly geared. Savills estimates that nearly two-thirds of this group will be able to deploy equity with low gearing in the next year.
For developers, the wider economic context has made partnering with an investor more attractive due to the additional security it provides, as well as due to the lack of alternative development opportunities. Such forward funding arrangements mean developers avoid the use of expensive debt to finance projects, and gives them a guaranteed exit on completion at a price agreed before construction begins.
Multifamily to support housing delivery nationwide
Savills expects Multifamily 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. Nearly 16,000 Multifamily apartments started in 2022 across England.
“A recognised benefit of Multifamily is that that it can accelerate housing delivery as it allows developers to continue to deliver homes to buyers while also delivering for large scale investors. On larger sites, in particular, Multifamily can increase delivery rates over and above the normal annual target for open market sales due to its more diverse occupier base, allowing both tenures to be delivered on the same site at the same time,” concludes Polly Simpson.
*This amount is based on actual capital allocated rather than Gross Development Values and excludes commitment/partnership announcements.