Commercial real estate provider Franklin St has released insights from its London Build to Rent study tour last month (June 2024), which included attending the Bisnow Conference (BTRAC) at Canary Wharf.
Franklin St discovered that the London Build to Rent market presents a mix of challenges and opportunities. Key themes from the study tour and BTRAC highlighted the complexities of operating in this space. Higher hurdle rates, high supply levels in areas, extended lease-up periods, and elevated build costs are prevalent issues. These factors contribute to a competitive and challenging environment for developers and investors alike.
Despite these hurdles, the potential for growth remains. One industry expert noted “the fundamentals in residential for rent are unbelievably strong.” This sentiment underscores the demand for rental properties, even in a difficult market. However, adapting to these conditions requires strategic adjustments and a forward-thinking approach.
In contrast to the Australian market, the English cash rate is currently at 5.25%. Housing supply is at a different juncture, largely due to Australia’s unprecedented population growth. This economic backdrop adds an additional layer of complexity to the London market, influencing investment decisions and development timelines.
Franklin St found that a significant theme in London was the shift towards new models to maximise returns, both in operations and deal structuring. While short-term rentals offer higher yield opportunities and shorter lease-up periods, the broader trend is towards flexibility and innovation in property management. This approach includes enhancing resident experiences and integrating technology to streamline operations and improve tenant satisfaction.
Additionally, the conference highlighted a general pivot towards alternative sectors, such as living and storage. This shift is driven by macro capital movements away from traditional real estate investments. As one speaker stated “a lot of capital is not yet ready to get in but is very close.”
Concerns with redemption queues and having to wait to be able to shift investments toward residential are prominent, Franklin St highlighted. This capital will likely flow into Build to Rent as economic conditions stabilise, creating long-term growth opportunities.
Franklin St learnt that Government support and regulation play crucial roles in shaping the UK Build to Rent landscape. Favourable debt pieces from local governments and initiatives to promote affordable housing are pivotal. However, the regulatory environment remains a significant risk factor. As Franklin St noted during the conference: “regulation and fire safety, among other factors, are killing gross to net leakage.”
A notable regulatory change in the UK is the introduction of new laws requiring dual fire stairs in tall residential buildings. This regulation aims to enhance safety, but also impacts the design and cost of Build to Rent projects significantly.
Franklin St state that it is crucial that policy changes in Australia are clear and attainable. Even with a high quality of construction, the sector will continue to advocate for policies that support the growth and sustainability of the Build to Rent sector.
The BTRAC event revealed that single-family rental (SFR) has emerged as a promising segment within the UK Build to Rent market. With 11,500 SFR homes and a pipeline of 22,000, this sector is gaining traction. The demographic trends are also favourable, with 40% of occupants being couples and occupancy rates over 90%.
The SFR market offers several advantages, including increased tenant stickiness and viability in lower rent areas. Notably, tenant retention improves with the number of bedrooms, suggesting a preference for larger living spaces. Furthermore, the focus on ESG initiatives, such as incorporating heat pumps, batteries and insulation, aligns with broader sustainability goals and enhances property appeal.
Franklin St highlights that SFR is poised to be a major part of the Australian market in the medium term, driven by similar demographic trends and demand for suburban living.
Franklin St is committed to leveraging these insights to inform its strategic direction. Its focus is on driving best in class outcomes, embracing alternative sectors, and exploring new funding models. By aligning the firm’s strategies with market trends and regulatory environments, it mitigates risks and capitalises on emerging opportunities.
The company also declared its dedication to advocate for clear housing strategies and policies that address planning issues and affordability. It believes that engaging with policymakers and industry stakeholders is crucial to shaping a supportive environment for Build to Rent development in Australia.
The insights gained from Franklin St’s study tour to London, including meetings with key industry players and attendance at the 2024 Bisnow conference, underscore the importance of adaptability, innovation and strategic alignment.
