An agency heavily involved in Build To Rent claims investment in the sector remains high - but soaring debt costs may deter some investors.
Savills says the UK BTR sector won some £4.3 billion of investment in 2022 with a sentiment survey by the agency showing that nearly two-thirds of European investors are likely to invest in the sector in the next 12 months.
“Yields softened as a result of the market uncertainty during the second half of 2022. But strong rental growth has meant that this has not fed through to capital value falls. As we move into 2023 investors will be looking to see increased liquidity in the market, which will help them firm up fair market pricing” comments Guy Whittaker, head of Build to Rent research at Savills.
“Investors will also be keeping an eye on rental growth and what is happening to the long term risk free rate over the coming months. Savills expects rental growth to continue and have forecast 6.5 per cent rental growth in 2023. With legacy deals closing and new opportunities coming to the market, we do expect to see a rise in investor confidence as we continue through Q1.”
Forward funding has been an integral part of the sector’s expansion in the UK with 75 per cent of investment in the past five years coming via this route. Nearly £900m was deployed to forward fund developments in Q4 2022 alone, says Savills.
The agency says a typical Multifamily block will take between two and four years to build and stabilise, and it claims that with strong rental growth in the wider market the Net Operating Income can be higher than projected – driving up the yield on cost and widening the premium over the risk-free rate, encouraging investors to commit equity via forward funding.
However the soaring cost of debt - which has nearly doubled in five years - remains a challenge for investors, admits Savills, which means highly leveraged investors are unlikely to be able to generate the same cash-on-cash returns as a year ago, leading some parties to temporarily pause acquisition activity.
But the agency insists that “this presents an opportunity for less geared investors to take advantage of reduced competition and secure the highest quality assets.”
Savills expects Multifamily units in the BTR niche to take up a greater share of housing starts in 2023; nearly 16,000 Multifamily apartments started in 2022 across England.
“A recognised benefit of Multifamily is that that it can accelerate housing delivery as it allows developers to continue to deliver homes to buyers while also delivering for large scale investors. On larger sites, in particular, Multifamily can increase delivery rates over and above the normal annual target for open market sales due to its more diverse occupier base, allowing both tenures to be delivered on the same site at the same time” says the firm.
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