Institutionally owned PRS assets are still a relatively new asset class in the UK. The recent surge in interest and investment from institutions, however, means that build-to-let is starting to challenge the more established build-to-sell sector as an investment opportunity.
Bond-like in nature. In the current low-yield interest rate environment, pension funds and insurers have been diversifying their portfolios and moving into a wider range of assets including property, infrastructure, private debt and private equity, in their search for yield. UK institutional investors have started to recognise the long-term benefits of build-to-rent assets often because they match their long-term liabilities. These assets are bond-like in nature generating stable, long-term rental income, notably higher than the yields generated by government or corporate bonds, and are not exposed to the risks associated with direct investment in housebuilder equities.
The premium of build-to-sell over build-to-rent is narrowing. Developers in the build-to-rent and build-to-sell camps have historically been competing for land, with build-to-sell developers able to pay up to 15% more due to the traditionally higher value of these projects. Today, this premium has narrowed to a single digit percentage however, as investors, who are now more familiar with the build-to-rent model and the security of investment returns, are prepared to accept a lower yield for such developments. The dynamics could shift further still and build-to-rent developments could in the future command a premium as the long-term rental model becomes better known and more established and investors seek the security of a long-term, lower-risk steady income stream.