As Build-to-Rent has begun to establish itself as a new model for housing delivery – and a new asset class for investors – the role of the public sector in supporting it has been critical. Especially important was the government’s shift – seen most clearly perhaps in its 2017 white paper – to recognising the role that different tenures (besides owner occupation and social housing) have to play in delivering the range and number of homes the UK needs.
Homes England is the Government’s housing accelerator. It provides a range of programmes to help those seeking to deliver housing projects, including the development of Build to Rent. Some of its past programmes have been specific to BtR, others aimed more at the wider development community, and offering debt and equity support.
Venn Partners manage a Government guarantee scheme, which seeks to support institutional investment in the Build to Rent sector, through the creation of a government guaranteed bond programme that will be used to finance long term loans to eligible PRS operators.
The sources of private sector investment capital have been very varied, as have what they have invested in. UK and overseas pension funds, sovereign wealth, private equity, listed and unlisted companies, UK REITs, European and North American multifamily investors are all active in the UK market. Some investors have taken development risk and been prepared to provide forward funding arrangements. Others have entered into forward purchase agreements and simply purchased stock off a developer when complete. These two routes to market have different tax consequences.
What is being built also varies with about four-fifths of the market investment by units aimed at apartments and about a fifth low-rise, often family housing. Much of the BTR pipeline is purpose-built for rental, and in parts of the country will incorporate Affordable PRS units as part of planning gain.
Specifically as regards the BTR market, the government has been clear that its goal is to help create the market for funding and financing BTR investment, not to be that market. As interest from developers, operators and investors grew, there was a sense that lenders were lagging behind.
It is entirely appropriate for lenders to take a more conservative approach than equity investors – after all, a lender generally has no upside beyond having its loan repaid, along with its charge for the provision of finance, in the form of interest. Lender caution is especially natural for a new asset class, where there is an absence of relevant historic market data or comparables, and no prospective borrower can point to an exactly relevant track record.
CREFC Europe, the trade association for commercial real estate finance, had begun discussing the creation of a BTR finance working group in 2015, but the initiative finally took off in early 2017, when the Brexit backdrop threw into clear relief the appeal of BTR as a defensive asset class with strong supply/demand and demographic characteristics.
The working group that emerged had strong representation from developers, operators and investors, as well as from lenders, with participation from other relevant industry associations such as the BPF and UKAA, and relevant advisers. It has also consulted with Government and Homes England. Its goal was to ensure that the growth of the UK BTR sector would not be impeded by lack of market understanding among lenders about BTR, and among BTR sponsors about lender questions and requirements.
You can read more about the working group and find the work it has published so far here.