UNLOCKING INVESTMENT STRATEGIES
UNLOCKING INVESTMENT STRATEGIES
Interest rate cuts and improved debt pricing paved the way for a record year for BTR investment in 2024. Looking ahead, the funders and developers we spoke to remain bullish.
Half (50%) of the funders we surveyed reported a very strong appetite for lending to the sector and a similar proportion (47%) had a moderate appetite for BTR lending. Very few (4%) said their appetite was limited. In addition, over a third (39%) view BTR as having more long-term resilience than other classes of real estate.
Very few (4%) said their appetite was limited.
Over a third (39%) view BTR as having more long-term resilience than other classes of real estate.
That positivity in the sector was echoed by developers where three quarters (75%) rated the current investment environment as favourable, with just over a quarter (26%) going as far as to say “very favourable”.
What’s more, that confidence extends beyond our shores. Developers point to strong UK rental demand, promising returns and growing recognition of the sector's potential as key factors that make UK BTR a prime opportunity for overseas investors.
Three quarters (75%) of developers rated the current investment environment as favourable.
Key factors in lending decisions
When it comes to decisions on financing schemes, funders reported that the three most influential factors are:
Operator experience and financial strength.
Occupancy levels and rental income stability.
Government policies and regulations.
Separately, funders also cited three key risks being:
Oversupply of locally competing schemes.
Construction delays.
The loan market may not support a refinance.
John Connor, Partner and Head of Financial Institutions sector, explains:
These decision-making factors are fascinating. There are only so many experienced operators around so if developers are being encouraged to use the same partners on all their schemes, that could constrain the market.
It’s also interesting, but not unexpected, to see construction delays as a key risk. For developments that are 18 or more metres or seven or more storeys high, this can be linked to the Building Safety Act. While everyone agrees it has provided much-needed changes to building regulations post-Grenfell, teething issues with the administration of those regulations has led to issues that make sector participants nervous.
An overwhelming 96% of developers believe the Building Safety Act and other building regulations have had a depressive impact on the delivery of BTR.
John Connor adds:
Missteps in meeting the new Building Safety Act requirements, coupled with a shortage of registered building inspectors, has caused delays to projects. As many BTR developments are debt funded, any delays have the potential to increase the interest payable by the developer and depress the overall profitability of a scheme. I’d expect these issues to recede in the future. Developers of future schemes should be able to benefit from the lessons learned from these early experiences, and the numbers of registered building inspectors should increase over time.
Government intervention
When asked how funding sources might shift over the coming decade, developer views were split fairly evenly across a variety of different options. These included more private equity, a greater reliance on institutional investors, and the growing use of alternative financing models – such as crowd funding or fintech platforms. However, an increase in government funding topped the list.
Similarly, ‘increased funding and incentives’ was also the most popular answer when developers were asked what additional government actions would support their goals, marking public finance as being crucial to the sector’s continued growth.
John Connor summarises:
Housing policy is a devolved matter, so the governments in England, Scotland, Wales and Northern Ireland can support the BTR sector in line with their own strategies and regulations. The Welsh government, the Scottish government and the Northern Ireland Housing Executive already use, or are developing, grants and rent guarantee schemes to support BTR projects and increase housing supply generally.
For the BTR sector in England, government funding usually means the involvement of Homes England. By collaborating with developers and local authorities, Homes England is increasingly part of the picture in BTR deal activity we have advised on. The organisation is playing an important role by stepping in to do things that, perhaps, traditional banks haven’t been able to do: increasing housing supply, promoting urban regeneration and attracting investment to the sector. We're also starting to see local authority pension funds providing an additional source of liquidity to fund new BTR projects.
