Single-Family’s North-South Divide

Most investment in single-family build-to-rent to date has focused on the Midlands and the North, but given the right conditions it is a nationwide asset class.

- says Adam Stephenson of Ascend Properties.

Take even a cursory glance at the real estate press and the increasing popularity of single-family build-to-rent becomes immediately clear. News of forward-purchase deals are commonplace, with institutional names and private equity giants among those planting their flag in the sector.

The asset class is relatively modest in size as things stand – current estimates put it at around 10,000 homes in total – but it is on the cusp of exponential growth as work on these new homes completes in the coming months and years. A trickle of investor interest a decade ago has become a wave of capital underpinning new single-family schemes across the country.

I say “across the country”, but at the moment that’s not quite true. Dig a little further into the press releases and stock exchange announcements, to find out where exactly the new homes are being built, and it usually boils down to five regions: the East and West Midlands, the North West, the North East and Yorkshire. Existing portfolios are also concentrated in these areas.

This does beg some major questions. Why is the sector so focused on these locations? And is it viable as an asset class in the South, or Scotland and Wales for that matter? Put simply, is single-family build-to-rent an exclusively Midlands and Northern play?

Fundamental appeal

At a basic level, single-family works as an asset class where values and rents enable investors to make a return, much like any other sector. So far, so vanilla. But the residential rental market has additional considerations which complicate the picture.

Potential occupiers can also be competing buyers for the available stock, if market conditions make homes more affordable for private buyers. Similarly, there is the question of there being enough product to make it worthwhile – institutional single-family portfolios only work at scale, and it doesn’t matter how high the theoretical yield is at a certain location if there aren’t the homes to buy.

Broadly speaking, it is these dynamics that have driven the sector’s focus on the Midlands and the North. Towns and cities in these regions have found it politically easier than the South to greenlight large-scale housing developments. That means a lot of stock coming onto the market; as rising interest rates have led to fewer private sales, many housebuilders have found themselves with significant numbers of homes to shift. With business models built around volume, they have been happy to offload houses in bulk to institutional buyers.

Movements in house prices and positive rental growth in these areas have created a more favourable yield equation for single-family investors, even while rising debt costs are causing some institutions to revisit their investment strategies. Such market conditions are not unique to the Midlands and the North, but they are perhaps more exaggerated than in locations where residential development has been more modest.

Expanding reach

Given these constraints, what prospect is there of single-family becoming a major force outside of its current heartlands? The levels of return demanded by investors make southern locations a trickier prospect at the moment, but plenty can change, and on a fundamental basis the model works anywhere that a high enough yield can be achieved at scale.

If housebuilding surges – something that could be more likely if there is a change of Government next year – then the supply situation would be more amenable to single-family in a wider number of locations. As for the demand side, rising rents across the country are shifting the dial in previously unviable locations. This nationwide imbalance between rental supply and demand is a key factor, and as more capital enters the sector, investor appetite will likely expand into ‘new’ areas. High growth regions, such as the Oxford-Cambridge arc, would seem a natural home for wider adoption of single-family BTR.

Ascend is the UK’s largest single-family build-to-rent lettings and property management specialist, and anecdotally we are starting to see enquiries about mandates in regions beyond the traditional areas of focus. As the asset class becomes more established, and investors more comfortable with the risk profiles involved, they are looking at opportunities in previously untapped towns and cities.

As we look at the market today, two things are clear. Firstly, single-family is still young and finding its feet, but attracting the investment it needs to quickly achieve a formidable scale. Secondly, this is an asset class that has a key role to play in the future shape of the UK residential sector – a quick glance at more mature markets, such as the US and Germany, shows the potential it holds. Its expansion to new regions seems both inevitable and desirable, but only when the market conditions are right.