The Days Of Easy Money In BTR Are Over. Now It’s Time For Marginal Gains

It’s rarely truly easy to make money in any sector of real estate, but for the past few years, things have been about as good as anyone could wish for in build-to-rent.

That could be coming to an end.

Pre- and immediately post-pandemic, investors were keen to get into the sector, which combined with low interest rates to push up values. When rates started rising in 2022, buying a home got even harder, pushing up demand for rental accommodation. Private rents rose by an average of 9% in the UK in the year to May and 11% in London, well above inflation. 

Today, those conditions are harder to find, a host of experts told an audience of more than 350 people at Bisnow’s Build-to-Rent Annual Conference, held at Canary Wharf’s One Canada Square building. The event was held in partnership with Canary Wharf Group’s Vertus brand and Bidwells. 

The sharp increase in the cost of debt and construction has made investing in the sector much more difficult. And while a favourable balance of supply and demand means rental growth is still possible, it risks squeezing an increasingly stretched consumer. 

To combat these issues, existing owners are hunkering down and becoming laser-focused on improving their operating margins. Investors are looking at only the best possible schemes and getting creative for financing. 

“I think certainly in London right now, we have a very price-sensitive customer for the first time, and that is a new reality for us to deal with,” Quintain CEO James Saunders said.

“There was a lot of growth and rental coming to the sector at the end of Covid as the market stabilised. What we're experiencing now is probably the new normal, but this sector is so young, it's quite hard to define what the normal is.”

Residents don’t just view a property once before signing a lease these days — they view it two or three times. That equates to working harder to secure the same deal, Get Living CEO Rick de Blaby said.

“We're always focused on customer service, as everybody would in this game,” he said. “Equally, we have to be focused on delivering the shareholder return. And in the world that I live in, with big global institutions, that's measured by total returns, the income return and a capital return. That's a hard gig at the moment, when the yields aren't compressing and some of the debt costs are high.”

In the investment market, buyers are sitting on their hands, particularly new entrants, be it for existing assets or forward-funding new developments. High construction and debt costs are making new schemes less viable, and investors are shifting into other asset classes like bonds to reap more favourable returns. 

But as interest rates start to drop, investors will come back to real estate generally, Moorfield Chief Legal and Corporate Development Officer Sadie Malim said. And when they do, they will be shifting allocations from sectors like office and retail to rented residential. 

“The market is not quite right yet for [investors] to liquidate their offices and their retail assets and to be able to shift more materially into living sectors,” Malim said. “But it's going to come.

“We're thinking that this sector is obviously very attractive from a long-term perspective. Towards the end of this year, perhaps going into next year, interest rates start coming down, and we start seeing some more of that international capital looking for a home in the living sectors in the UK.”

The panel pointed to data from the British Property Federation and Savills showing that for the first time on record, completions outnumbered starts in the BTR sector in the first quarter. Combined with growing investor interest in the sector, Malim said that could create an undersupply of assets for investors to buy, which could in turn push up prices in a few years. 

But Malim said the private equity investor is becoming increasingly picky about the schemes it is willing to fund. 

“What we say to the origination team is, ‘We are still looking for what we call that institutional grade-quality asset,’” she said. “So we're looking to build things that have great ESG credentials.

“We are saying proceed with caution, because we are underwriting rental growth, but not the levels of rental growth that we've seen historically.”

Where possible, Malim said the firm is looking to buy schemes with existing favourable debt in place, such as loans from a local authority or Homes England.

For existing investors like Quintain and Get Living, both of which manage about 4,000 existing homes, the focus now turns to driving income and running their portfolios more efficiently to improve rental growth. 

“We're trying to deliver margin when we don't have easy rent growth,” Quintain’s Saunders said. “Rent growth can mask other challenges, and we spend a lot of time trying to improve our margin within our buildings.”

Ways of doing this include bringing in house services that would be outsourced, making the company’s procurement process more efficient, and training and hiring the best staff possible, he said.

“I just find myself, my colleagues, running up and down the battle line all the time, going, ‘Right, have we got a great team that's well trained, well motivated and in a good place?” de Blaby said. 

Having a product with apartments, lobbies and the whole customer journey that really “pops” is something that Get Living is constantly analysing, de Blaby said. Having a proposition that resonates with the audience in a way that differentiates it from the competition is also key.

De Blaby added that marketing and digital campaigns that target audiences it is trying to reach with that proposition is vital, as is a robust tech suite that makes the company more efficient. 

“Now that we're not all running with the wind behind us, we just have to be really operationally slick,” de Blaby said. “We're just going to have to be a lot smarter in everything we do. This is a case of real marginal gains. You're just taking little slices of improvement everywhere you can.”