Build to Rent specialist Franklin St’s paper ‘The Build to Rent Equation’ highlights the differences between the Build to Rent and Build to Sell sectors.
Franklin St have found that ownership of multiple residential assets involves differing objectives, influence and motives compared to single asset ownership. These motives and objectives vary significantly from asset to asset, and include providing housing for lower-income or key-worker households, defensive investment, portfolio diversification, secure, inflation protected cash flows, and profit maximisations.
While the objectives vary, the typical differences hold true across the sector. Build to Rent assets are funded and delivered in several different ways. These projects are funded through a wide spectrum of capital investors with different risk and return objectives.
In a mature market, there are typically four main approaches in how Build to Rent development is structured: Platform Model, Forward Fund, Forward Sale and Retail Sale. The main difference across this spectrum is in defining who is responsible for the various risks associated with ownership and development.
Under the platform model where the business is vertically integrated, capital is typically exposed to delivery risk (including managing the builder) all the way through to the operational risk that comes from owning the completed asset. This approach introduces planning risk in certain instances – as well as return hurdles to match.
With a Forward Fund, passive capital is looking to offload the planning and delivery risk to a capable developer who is an expert in this process. The investor funds the cost of delivery and acquires the land prior to construction. This minimises its delivery risk, but offers an opportunity to own the Build to Rent asset closer to its raw cost.
A Forward Sale involves an investor committing to purchase the asset upon successful completion. This further reduces the delivery risk to the investor, but likely increases the cost to acquire the asset accordingly.
Finally, Franklin St highlight that investors can purchase stabilised and operating Build to Rent assets at a full retail value, similar to acquiring an operational retail or office asset. This approach entails the least risk, but is typically the highest price compared to other structures.
