With penthouses, Uber rides and running tracks aplenty to lure tenants, does build-to-rent still have hurdles to overcome? Property Week looks at the headline issues to be debated at next week’s RESI Conference.
Clusters of handsome listed buildings being redeveloped for an emerging tech community line Manchester’s NOMA neighbourhood. Sadler’s Yard, named after 18th-century balloonist James Sadler, sits alongside one of the region’s biggest residential schemes. While critics may have dismissed build-to-rent (BTR) as being a load of hot air, the sector is now flying.
Indeed, swift progress has been made next door at Angel Gardens following Deutsche Pfandbriefbank’s £85m finance deal with Apache and Moda Living last January.
Few were surprised that Apache courted a German lender for such a lofty debut. The bank’s covered bond status allows it to be highly competitive on price. And Germans love renting, right?
“European lenders are also likely to have undertaken a significant amount of lending to BTR already,” explains Alastair Carmichael, GVA’s head of real estate finance. He believes lenders are gradually getting more comfortable with the sector.
Richard Jackson, managing director at Apache Capital, said: “We are now seeing strong interest for the £650m balance of debt funding that will deliver our secured £1.1bn BTR pipeline.”
While America has inspired many amenity-rich buildings, its financiers are now crossing the pond too. Wells Fargo has already made a big splash in north London.
“The role multi-family plays as part of a wider housing solution in a modern economy is well understood,” notes Stacey Flor, managing director for UK commercial real estate at Wells Fargo. “Our support of Quintain’s development in 2016 demonstrates how this experience helped us be early supporters of the UK sector.”
Yet, despite major deals, the RICS is yet to update its guidance, although change is coming, explains Platform_ chief executive Jean-Marc Vandevivere.
“In most cases, a discount to open-market value [OMV] is being promoted,” he says. “There are numerous locations where BTR schemes would have a similar or even higher valuation than OMV.
“This would allow for higher loan advances and increase viability of schemes.”
Such challenges haven’t stopped RBS backing a number of high-profile schemes - such as Vantage Point in Archway, which now has a waiting list. Chiara Zuccon, the bank’s head of PRS, thinks a performance benchmark and a functioning secondary market would help.
“BTR carries different risks from residential developments for sale and as such debt needs to be structured differently to get lenders comfortable,” she says.
According to Delancey’s Lesley Chen Davison, there needs to be “an alignment of interests between regulators, developers, lenders and policymakers”.
The way lenders are forced to allocate capital against loans they make under the ‘slotting’ regime can vastly affect how much they have to lend. “The slotting framework doesn’t work well with BTR,” admits Peter Cosmetatos, chief executive of the CREFC Europe, the trade body for property lenders.
Many want the Bank of England to bring regulation more into line with the government policy. Davison believes one route to do this could be to treat BTR like infrastructure rather than speculative housing when it comes to scoring risk.
There needs to be an alignment of interests between regulators, developers, lenders and policymakers - Lesley Chen Davison
“It would ideally give a lower risk profile for banks’ capital requirements,” she says. “Borrowers’ cost of capital could be reduced and lenders’ appetite should increase, speeding up market growth.”
CREFC Europe has been working behind the scenes with banks and developers to offer advice both to lenders and regulators. But Cosmetatos is wary of investors becoming hooked on subsidies.
“As private credit becomes more widely available, government needs to adapt the way it supports the sector to make sure it is not crowding out private capital,” he explains.
“The goal is not for government subsidy to underwrite the BTR sector indefinitely.”
Davison suggests supporting banks with partial government guarantees in the development phase, something insurers are also keen on to drive modular developments.
“Government could stand behind the insurance industry in a manner that costs nothing but which adds an invaluable endorsement to get offsite schemes off the ground,” says David Wigley from Willis Towers Watson.
“More broadly, there’s huge opportunity for innovation which could help lenders get more comfortable not just with occupancy risk - but the various other associated risks occurring at every point in the asset lifecycle.”
Some debate does remain around rental covenants - and whether they suppress values. While some investors are simply renting regular apartment blocks, purpose-built schemes from Moda and Greystar are heavily weighted towards communal facilities that would gobble up service charge like there’s no tomorrow if split up for sale.
“It is a fundamentally different product,” explains Michela Hancock, senior development director at Greystar. “The emergence of truly purpose-built rental product will help local authorities come to appreciate this. Greater flexibility will promote more market activity.”
She adds: “With the right scale and provision of customer-responsive amenities, valuers seem to be comfortable using NOI.”
Indeed, Greystar, like the city of Manchester, has a huge pipeline of premium BTR ahead of it. As with Sadler’s balloons, all investors need hope for now is some steady inflation while navigating the Brexit winds ahead.
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