Trends for 2023

This week's mini-blog is the first in a series of articles on market trends for 2023 and beyond, speculating on where the housing sector could go and how we see the p2p sector correlating with that. For the inaugural offering, we are focusing on the rise of build-to-rent; we speculate on what's driving that, the market demographics involved, and how the alternative lending sector could play a part in its future growth.

Build-to-rent is very much an industry term, so it's essential to differentiate this from schemes set up to stimulate the market; it simply refers to the process of units being built for purposes of retention, with the value of the assets being realised in the future rental yield, not the immediate sale into the broader market. There is a caveat here that some schemes officially categorised as 'BTR projects' are subject to government guidelines around affordable housing, requiring at least 20% of the site designated for that purpose, which could create an issue should the units have to be sold. However, this blog isn't exploring BTR schemes; it's imagining how they may evolve into something new and what that could look like for our clients.

Savills have published that over five billion has been invested into the build-to-rent private sector throughout 2022. They cited rental income growth and the decreased availability of units for renting as the cause. However, this is also coupled with lower rental voids and reduced arrears amongst a new breed of renters. Rightly or wrongly,  these are tenants who would have traditionally been owners, now renting into much later life, servicing the rent with their higher income levels.

PLCs looking to acquire housing assets will often look at acquisition, development, and retention as the three parts of the same overall process, resulting in a yield-baring asset 18 to 24 months down the line. So, is there a scenario where market entrants and smaller developers are also looking to build portfolios? We believe that may be the case.

With established players, the rentals on offer tend to be slightly over the market average because these properties offer somewhat more to the prospective tenant. However, this can range from superior management levels and less restrictive tenancies to onsite gyms and well-manicured green spaces, literally and figuratively, all the trimmings. These amenities are usually provided by a network of sub-companies underneath the PLC. So, could that kind of scheme be manageable at a grassroots level? With the right mix of partners and supporters, the more established entities often lead where others follow; the idea will be the same for smaller businesses; however, the components perhaps wouldn't be managed in-house, and it would be scaled back for a comparable budget.

Essentially regardless of the size of the prospective client, the data remains the same; property prices and rental prices, according to macroeconomic theory, should move together, but in reality, they don't always correlate when there are problems in the market. For example, Zoopla's annual market rent report has shown a 12.3% increase in rent in 2022, and if you isolate just London, 17.3%. There is no indication that these figures will retrace compared to house prices, with the shortfall of available stock bidding up the rentals month on month.

We speculate rents will continue to rise, as theoretically, in a recession, mortgages become less obtainable or too expensive in the short term for some, forcing up rental demand. Therefore, it's possible to theorise that the two metrics become briefly uncorrelated, house prices will go down, and rents will continue on their current trajectory. So naturally, people will step in to profit from that scenario in the short term.

There is no reason why smaller developers won't also bet on generation rent, and the mechanics are certainly in place within the alternative market to allow clients to build substantial portfolios, working in conjunction with onward-term lenders.

When selecting a lender in the space, it's essential to consider a platform that has a commercial mindset and understands that, in this scenario, the initial profit modelling will be different, as the money is made through the onward yield, not at a point of sale. Also, with the structuring of development finance, such as our offering, there is substantial headroom in the leverage v gross development value; the products dovetail nicely into term lending products even in a market where house prices have retraced slightly.

The final point to make is understanding prices and rental yields in that local area; we work closely with clients and quantity surveyors on a regional level to gauge an understanding of that, so if a scheme is aimed at above-average rental returns, we can understand the feasibility of that at the point we decide to assist.

So to summarise, where there is demand, there is a solution, and should this trend continue to infiltrate the broader market, there will be a home for these clients in our sector.

Our Development Finance clients can benefit from facilities up to 70% LTGDV (Up to 80% LTC) frm 6.40% + Bank of England Base Rate & Fees. For a full breakdown of the criteria, please email us at borrowing@investandfund.com or call us on 01424 717564.

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