Commercial Insights - Build to Rent: Going mainstream.

What we know

Lockdown restrictions have been eased. The government has amended the coronavirus regulations to make clear that people who wish to move home can now do so. The lifting of the full UK lockdown will run in stages through to at least July, but the announcement untangles one of the main sticking points for the rental market with an inability to conduct viewings slowing the lease-up of newly constructed buildings as well as of vacant units. Initial signs are that demand has bounced back strongly, with weekly new prospective tenant registrations 9% above the five-year average. Logistical challenges are ongoing, but the liquid nature of the rental market, combined with a release of pent-up demand for good quality rental product should drive a pick-up in new tenancies.

Rent collection has been robust. Rental accommodation has proven resilient in previous downturns and evidence so far suggests that the sector has weathered the initial impacts of COVID-19 remarkably well. Rent collection averaged more than 96% in March and nearly 94% in April, according to the results of our survey of some of the biggest investors in professionally managed PRS in the UK. Figures for the remainder of the year will be tied to the wider economic picture (particularly surrounding unemployment), but initial signs are encouraging.

What we expect

Interest from institutional investors and new entrants to the market could rise. Prior to the outbreak of COVID-19, institutional investment in residential assets, and of diverting capital away from other commercial real estate sectors, was an increasing trend. The current crisis has only served to reinforce the outlook from investors on the defensive characteristics of the sector, as well as the granular nature of income. We expect that a search for core income-producing assets in safe-haven locations (such as the UK) from investors may well act as a catalyst supporting this shift of investment. Our investment team has already experienced a rise in enquiries, particularly for stabilised assets and from new non-domestic investors.

Rental performance will be increasingly asset specific. Near-term expectations among owners and investors are generally for no rental growth, or a slight fall in rental values in 2020. Our view is that BTR rents will be unchanged this year before recovering in 2021 and picking up thereafter. Within this, however, asset specifics will be significant, with performance likely to differ between assets dependant on - but not limited to - their exposure to student, international and corporate tenants, as well as local supply volumes and affordability dynamics.

What we question

What will the long-term impact be on tenant demand? The number of sales transactions is projected to fall nearly 40% in 2020 compared with last year, equating to over half a million ‘lost’ sales. Logic dictates that some of this demand will be absorbed by the rental sector, but it comes at a time when the shift from owner occupying to renting has slowed. A lot will depend on the speed of recovery within the sales market, but with fewer households looking to buy during times of heightened economic uncertainty (as experienced in the wake of previous recessionary periods), and long-term forecasts pointing to continued growth in new household formation, we believe momentum will pick-up once again.

Whether tenant preferences will be changed. Shared amenity space, such as gyms, lounges, and external terraces and gardens have universally been closed and any re-opening is likely to be gradual and require some form of social distancing measures. Operators will be keen to understand the practicalities of such an approach, as well as the costs involved. Tenant demand may well be for adaptable multi-use, rather than single-use, spaces. Demand for provision of some form of private outside space is likely to increase and command a premium.