Lessons Learned from Emerging Build to Rent Markets in Europe
An analysis from Bruno Lobo (UKAA)
In May 2021, Bruno Lobo (S+A Capital and member of the United Kingdom Apartment Association) published a short study on “Lessons Learned from Emerging Build to Rent Markets in Europe”. As our readers may know, Curiosity is Keys has paid quite a bit of attention to Build to Rent in the last couple of years. We’ve even published our own analysis on multifamily housing and BTR in January 2021. We got interested in Bruno Lobo’s work because it focuses on the BTR market in the UK, which is some years ahead of the French market but still behind other European countries such as The Netherlands or Germany. Here are our main takeaways.
Let’s start with a quick reminder: “BTR”?
According to the UK’s Planning Ministry, “build-to-rent (BTR) housing is large-scale, purpose-built rental housing that is held in single ownership and professionally managed.”
The British Royal Institution of Chartered Surveyors (RICS, 2018), goes a little bit further and defines a build-to-rent property as likely to possess the following broad characteristics:
- buildings will typically comprise of at least 50 self-contained dwellings or a concentration of a similar number of dwellings
- the dwellings will be separately let, but held in unified ownership
- management & oversight will be under a single entity, potentially with an onsite presence
- the building(s) may be specifically designed or adapted for rent, and may include some form of shared amenity and
- the individual dwellings are typically let on assured shorthold tenancies.”
Why is the BTR sector growing faster in some markets than others?
Noting that the BTR market is less developed in the UK than in other European countries, Bruno Lobo wonders what could be strategies for growth of the BTR sector in new markets such as the UK.
“The [BTR sector has increased] from 11% of the total real estate investment in Europe in 2011 to 23% in 2020. The BTR sector in the U.K. […] currently represents just under 1% of the total value of privately rented housing and is expected to reach a penetration of 35% of the total privately rented housing in the UK at full maturity.”
“Why is the BTR sector growing faster in some markets than others? What conditions are required for the BTR sector to overcome the barriers to institutional investment and reach the maturity of established markets such as the US and Germany? How can new markets foster the creation of adequate BTR products that are suitable for institutional investment?”
Challenges the sector faces in Europe
Bruno Lobo identifies 11 different challenges BTR could face, explaining differences of market maturity across Europe:
- Lack of data and benchmarking information
- Rental legislation (need for flexibility)
- Planning controls and obligations (“Lenders and most institutional investors will expect the planning process to be complete or near-complete before they are willing to fund”: the exact opposite of BTR)
- Building regulations and residential design (“Consented projects are typically designed for sale and require an extensive redesign to fit the BTR model”)
- Bank financing
- Equity requirements
- Lack of alternative funding sources
- “Absence of operators with experience, scale with and staffing suited to the specificity of the operational model and service requirements of BTR to establish the management costs which determines the gap between the gross and net yields.”
- Residual Land Values
Strategies for growth of the BTR sector in new markets
According to Bruno Lobo, the growth of the sector depends on the ability of public and private sectors to work together. In particular, ”the experience from more established BTR markets across Europe indicates that the following measures need to be implemented”:
- The public sector needs to adapt the regulatory framework to BTR, “creating favorable planning conditions, adapting building regulations and housing legislation”
- Lenders need to tailor loan structures and financial covenants
- Investors must provide alternative forms of financing
- Developers, contractors, and consultants must develop products adapted to the specifics of the BTR business model
👉 At Curiosity is Keys, we believe in the opportunities BTR could create. We are currently conducting dedicated extra work on this issue and are ready to start for France the collective action Bruno Lobo recommends. Want to join the adventure?
