CFO Dan Greenslade in React News: Exceptional circumstances – or just a return to normality?

January 16, 2024

The long-term view of build-to-rent means it is ready for the new economic reality

Much has been said about the huge change in economic conditions over the last 18 months, and it’s easy to feel pessimistic given the rate of inflation, the increase in interest rates and subsequent rise in the cost of debt and build cost.

However, what we are seeing is the correction of a market that has been skewed since the 2007 financial crash. Those of us that cut our teeth before the financial crash recognise the current market conditions not as exceptional, but actually as a return to normality. The period of ultra-low interest rates was always going to end at some point, even if few predicted how suddenly it would happen, accelerated by the series of market shocks we’ve seen in the form of the Covid pandemic and conflict in Europe and the Middle East.

Of course, we shouldn’t underestimate the current situation. We are now seeing the consequences of that era of debt-fuelled dealmaking and development, with loan to value ratios seeing an abrupt and unplanned shift, often leading to a quick offloading of assets.

However, whilst these economic conditions are undoubtedly more challenging, it is imperative that the real estate sector, and, in particular, the residential sector, is able to adjust and continue to deliver the new homes that are so badly needed.

With interest rates set to remain high for some time as the Bank of England makes the necessary steps to tame inflation, the market must adapt rather than wait. Whilst it will undoubtedly have an impact on near-term property valuations and may result in some reductions in leverage, it does not necessarily follow that we will see lower returns over the long-term.

The property sector, by its cyclical nature, requires a long-term view. The closing of open-ended property funds reflects the shortcomings of a market that cannot move quickly by virtue of its illiquidity, but long-term investors recognise the sector’s resilience.

We can see this clearly within the build-to-rent (BtR) sector. Our business model does not rely on realising value from our assets in the short or medium term. Our purpose is to generate a reliable revenue stream in the form of rental income, and to invest in our assets to ensure that they are fit for the future and value accretive over the long-term. In this way we aim to be less exposed to market shocks and cyclical downturns.

Whilst the obstacles to entry for new operators are now higher, experienced operators that have built scale and efficiencies are less impacted by build cost inflation and are able to benefit from efficiencies of scale.

The latest stats from the BPF show that there has been some slowdown in construction starts for BtR, but long-term plans for growth remain steadfast, underpinned by institutional capital that is attracted by the steady rate of return.

Sophisticated lenders are showing continued support for the sector. We recently completed a £150m deal with global investment manager, PGIM Real Estate, and other deals, including Quintain’s £780m refinance of Wembley Park, show that this is not an isolated deal.

As we adjust to the new economic reality, we mustn’t lose sight of the importance of new housing delivery. The housing crisis we are in will only abate with the delivery of new homes. We know that the underlying fundamentals of the market remain strong – demand for housing of all tenures is high and is set to remain so. There is urgency from all political parties now to stimulate building, and there is certainly ambition within the BtR sector to continue with development.

At Get Living, we have plans to deliver 6,500 homes in the next two years across the UK and, according to Savills, the BtR sector could increase five-fold by 2032, on track to becoming worth £170bn. With continued long-term support from institutional investors and lenders, BtR could soon become one of the leading asset classes in the UK, making real strides in resolving the housing crisis.

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