Institutional investment in the UK residential property market has been a very slow burn, but it is gaining traction rapidly, as investors switch their focus to stock built specifically for the rental market and let go of the ‘comfort blanket’ of high capital growth expectations to focus on long-dated income, according to a new report from Savills, Investing in Private Rent.
The research by Savills found that the build to rent development pipeline has grown almost five-fold (478%) over the past five years and there are clear signs of the sector becoming a mainstream asset class. Over the past year alone, the amount of operational build to rent stock has increased by over a quarter (26%) and the amount under construction by a third, bringing the total number of homes completed or under construction to over 50,000.
Last year, over 70% of deals were forward funding and forward purchase deals, as investors shift their approach to risk and accept a lower risk-free premium. Savills anticipates that risk-free rates will rise over the next five years, putting upwards pressure on yields.
“Rising interest rates will put pressure on values across all asset classes. Where build to rent stands out is its ability to mitigate that by driving rental growth and reducing the risk premium as the sector matures,” says Lawrence Bowles, Savills residential research analyst.
Evidence from recent transactions suggests investors are assuming a yield discount of as little as 50 basis points when funding development rather than acquiring operating assets. This is a small discount, given the additional indirect construction risk, the direct market risk when letting an entire development, and the sheer delay to the income stream of a large scheme.