Brexit to boost Build-to-Rent?

August 1, 2016 / Isla MacFarlane
Brexit to boost Build-to-Rent?

Build-to-rent has been something of a poster child for the housebuilding industry. As figures for homeownership continue to splutter, industry giants such as Legal & General and Grainger have seized an opportunity created by ‘generation rent’ and committed sizeable investments to the sector.

Build-to-Rent also has some pretty high profile cheerleaders. The Deputy Mayor for Housing, James Murray, recently reaffirmed the government’s commitment to Build-to-Rent and the Mayor of London, Sadiq Khan, has been pretty vocal in his support for the sector.

Build-to-rent attracts new investment into housing delivery, can deliver homes faster than traditional market sale developments and is less prone to house price cycles. The sector has gone from a virtual standing start to nearly 20,000 homes built or in development over recent years.

The build-to-rent sector currently represents one in five housing starts in the capital. Developers of homes for rent believe Brexit won’t derail the sector’s massive progress. Indeed, shifting market dynamics may even offer it a boost.

Demand for housing and particular rental properties has not be quelled by the UK’s decision to leave the EU. Some industry players believe that Build-to-Rent companies could be well-placed to buy new sites if traditional housebuilders choose to offload some.

“Build to rent developers have at times found it difficult to compete with volume house builders when it comes to acquiring sites, especially in places like central London where land values are sky high,” said Martin Bellinger, chief operating officer at Essential Living. “But as development activity cools in the wake of Brexit, land prices and construction costs will probably drop, opening up new possibilities for the purpose-built rental sector.”

Britain’s currency woes would also make it substantially cheaper for foreign investors whose pension fund money backs many UK Build-to-Rent companies. “Demand for rental accommodation will continue to outstrip supply, and any easing of land values could see yields move into more positive territory encouraging more investors to move in,” said Graham Bates, chief executive at LIV.

“Domestic funds need to be invested and international investors will benefit from a weaker pound,” he added.

Construction costs, a key viability barrier, are also likely to fall in the medium-term as development activity related to for-sale residential, commercial and infrastructure projects dies down, according to Mark Farmer, chief executive of Cast consultancy, which works with many major Build-to-Rent players.

Above all, rental demand is expected to stay steady and perhaps increase as fewer people take out mortgages. Any rise in interest rates could also upset the buy-to-let market, pushing tenants into the build to rent sector, as increased mortgage payments force landlords to sell their assets.

Growing demand combined with reduced supply would see rents rise, improving yields for investors, in turn encouraging further interest said Graham Bates, chief executive of LIV, a leading build to rent management firm.

Extending the stamp duty surcharge to institutional investors, which some believe was stop the UK government from falling foul of EU state aid rules, could also be reversed following Brexit, giving build to rent another lift.

“Build to rent will be one of the sectors better protected from the fall out of Brexit,” Mark Farmer, chief executive of Cast consultancy, said. “Less people will be taking out mortgages meaning the size of the rental market will increase. Land values will fall as for sale developers exit the market, so savvy build to rent players may benefit from a counter-cyclical strategy, focused on reducing build costs.”

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