Written By: Dan Batterton
Build to Rent has weathered the pandemic resiliently. With rent collection and occupancy remaining high, and economic trends looking supportive, there are compelling reasons to look to invest, says Dan Batterton of Legal & General Investment Management
Compared to many of its traditional commercial counterparts; the Build to Rent (BTR) sector has weathered the pandemic resiliently. Rental receipts have fallen for much of the market, although collection levels and occupancy remain high for BTR.
Whilst the full economic fall-out may not yet have filtered through, there are compelling reasons to be reassured of BTR’s resilience. Residential rental investment has typically remained robust in periods of uncertainty. Through the 2008/09 financial crisis, occupancy levels in the UK residential sector only fell to 96%, 2% lower than long-term average.
Emerging economic trends from the pandemic also look supportive. Recessionary periods are typically followed by increased demand for rental homes. Banks are also tightening credit conditions with high LTV mortgage products reducing substantially. Meanwhile, BTR aims to represent an aspirational choice, offering quality accommodation, functional co-working space and location close to desirable amenity.
We believe that the BTR sector is continuing to prove its resilience and looks set to maintain its upward rise in popularity. Whilst we are not out of the woods yet, the existing imbalance between demand and supply should continue to support growth in the sector.
The resilience and relative counter-cyclical nature of the residential sector is a key tenet of BTR investment. The pandemic has thrown this into stark relief and, whilst not entirely immune, the BTR sector has weathered the impact better than other traditional real estate sectors.
The national lockdown, and subsequent social distancing measures, have had a significant impact on economic activity. As occupiers have seen revenues decline, so too have rental receipts in many parts of commercial real estate. For BTR, in contrast, rent collection levels remain high. Knight Frank estimate that 95% of rent in the BTR sector was collected in Q2, compared with average collection levels below 80% in the commercial sector.
This is not to say BTR has been completely insulated from the effects of the pandemic. Through the lockdown period, the number of occupied units within our portfolio fell by 8% as residents benefited from the flexibility offered by break clauses. But, testament to its resilience and fundamental housing demand, new lettings activity recovered quickly as lockdown restrictions eased and economic activity increased. By August, occupancy levels had rebounded to pre-lockdown levels.
The stability seen so far is not completely cut and dried. The government’s furlough scheme, and an existing demographic tilt in the sector to young professionals, typically in jobs which have been able to transition to working from home, have protected household incomes and played a role in limiting the impact. As the furlough scheme transitions into its newest form, the job retention scheme, and the risks of unemployment potentially increase, there could be future negative impacts.
The sector may not be out of the woods just yet, but there are compelling reasons to be reassured of BTR’s capacity to weather economic deterioration. We believe BTR is still a nascent sector in the UK; historically, residential rental investment has typically remained robust in periods of economic uncertainty. Through the 2008/09 financial crisis, occupancy levels in the residential sector only fell to 96%, 2% lower than its long-term average.
The US multifamily sector, much more mature than UK BTR, also provides a guide to the relative resilience of the sector. Through both the 2001 and 2008/09 recessions, the US multifamily sector saw marginal falls in occupancy rates, shorter periods of rent decline and a quicker return to pre-recession rent levels, than traditional commercial real estate sectors.
Emerging economic trends from the pandemic also look supportive for the long-term prospects of BTR. As history shows us, recessionary periods are typically followed by periods of increased demand for rental homes, as uncertainty and economic conditions deter households from making big ticket purchases like new homes. We would expect to see the same occur through this crisis.
Alongside this trend, banks are increasingly tightening credit conditions for households. Available mortgage products at high LTV (90% and above) have already reduced substantially and mortgage rates have increased, despite the Bank of England’s benchmark rate at 0.1%. This is likely to create additional barriers for those looking to move into homeownership and continue to support rental demand.
We believe there are other pull factors at play which will support BTR’s resilience, with assets benefiting from some household behavioural trends and preferences, emerging through the pandemic. The increased likelihood of needing a functional space to work, as we move to more working from home, and the desire to reduce the use of public transport, for instance. These are well catered for in BTR schemes with dedicated co-working amenity spaces and assets located close to local cultural and leisure amenities.
Through the medium to long term, the existing imbalance between housing demand and supply should continue to support demand in the BTR sector. The pandemic is driving secular changes and a fundamental rethink of many areas of the real estate sector. A constant throughout the crisis, however, has been a reinforcement of the need and importance of quality homes. This is a need which continues to be underserved in the UK and will not have been helped by the negative economic impact of the pandemic. With all these push and pull factors at play, we believe BTR will continue to have a role to play in meeting that need, with the sector continuing to carve its place as a mainstay in the UK housing market and in institutional investment portfolios.
The value of investments is not guaranteed and can fall as well as rise.
All data as at December 2020.
Issued by Legal & General Investment Management Limited and LGIM Real Assets (Operator) Limited.
Legal & General investment Management Limited is registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.
LGIM Real Assets (Operator) Limited is registered in England and Wales No. 5522016. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 447041.