Rewind to a pre-Covid era. It was a strong start for the Build to Rent (BtR) sector, as the UK’s nascent Multifamily housing sector is known, with over £1bn of capital committed in Q1 2020, the highest levels of investment since our records began. The economic backdrop was buoyant as confidence was returning to the market after Brexit and general election uncertainty. Then, the pandemic struck and we were plunged into lockdown. The market came to a standstill.
Although we won’t know the full story until the wider economic impact unfolds, BtR has proved to be one of the most resilient asset classes, underpinned by strong fundamentals. There is still a chronic housing shortage, there is still a growing population, and even during a pandemic, people still need to rent.
Testament to the sector’s strength is reinforced as ‘institutional-grade build-to-rent properties’ became one of the first asset classes to have the Market Uncertainty Clause lifted for valuations. Investment activity has returned, albeit at lower levels for now.
CBRE residential valuation has access to a wealth of BtR data, and we have detailed insight into what is happening on the ground. This blog will explore how Covid-19 has impacted rent collection and occupancy levels and look ahead to the investment market outlook.
It has been widely reported that rent collection has remained robust, ranging from 92- 98% of rent demanded for May. Operators reacted swiftly, establishing hardship processes and worked closely with tenants. We have seen a range of strategies including:
- Rent Deferments - a % of rent deferred for an agreed period of time, to be paid back at a later date. Some investors are viewing deferred income as risky, however, there are only a small percentage of tenants deferring a proportion of rent currently.
- Incentives on renewals and new lettings - ranging from 1-4 weeks rent free period.
- Renewal strategies - some operators have not pursued uplifts at renewals or not implemented mechanisms provided for in the lease.
- Good will gestures - in some cases where amenity spaces have closed, a rebate has been given to tenants.
There is clearly a fine balance between maximising and sustaining income and occupancy but the underlying theme has been investors adopting a flexible approach and maintaining close communication with tenants in order to achieve this.
We have seen rental levels remain broadly stable as at Q2 2020. However, there will no doubt be downward pressure on rents considering the wider economic outlook going forward. Ability for operators to negotiate at renewal may also be diminished, and incentives / rent free periods offered to maintain occupancy will also reduce headline rents.
CBRE’s current house forecasts suggest rents may fall by up to 2% in 2020, but then return to growth in 2021, with increases of between 2- 4% thereafter:
Source: CBRE Residential Research
For stabilised assets, we have seen a slight dip in occupancy levels at Q2, with void rates edging up.
Generally the drop in occupancy can be attributed to lockdown restrictions preventing people from moving, with rental enquiries significantly down, c.40% during this period. Schemes with a large exposure to the student market were more severely impacted, with students immediately vacating.
But with restrictions easing, demand is picking up and we saw an initial surge from pent up demand. Although stamp duty changes may provide a boost to the sales market, there are still far less mortgage products available and with lower LTV’s and bigger deposits required, first time buyers may continue to rent.
From a valuation perspective, rent collection and occupancy levels will have direct impact on Net Operating Income (NOI). Going forward, this will largely be dictated by the wider economic environment and how deep and prolonged the recession will be. Currently we do not know the extent to which strong rent collection levels are propped up by the furlough scheme and how the risk of redundancies and lower employment will impact income affordability and demand for BtR.
Despite economic uncertainty, the investment outlook remains positive. Whilst Q2 investment volumes were significantly down year on year by c. 90% to £83m, deals that have progressed, have seen pricing generally in line with pre-Covid expectations. As such, CBRE published the Residential Investment Q2 MarketView in which residential investment yields remain unchanged.
Although some investors are taking a ‘wait and see’ approach, others have not been deterred and are actively seeking opportunities. Those pursuing deals are being more cautious and taking every step to mitigate risk throughout the process. Due diligence is more in depth and taking longer due to Covid restrictions, which has contributed to deals being delayed.
Overall, investor appetite remains strong and it is encouraging that there were over £1.4bn of deals under offer at the end of Q2. There are signs of increasing activity in the market and the sector is poised to make a rebound in the second half of the year.
We are likely to see a flight to quality as investors look to diversify portfolios and shift allocation away from other asset classes into BtR, which has proven to be less risky and offer more stable income streams during a downturn.
With the pandemic being far from over, and the threat of a second wave, BtR is clearly not out of the woods yet. However, the initial signs are encouraging with such strong rent collection levels and the sector is likely to show continued resilience in the face of economic uncertainty and continue to outperform other asset classes. There is a sense of cautious optimism in the sector and BtR remains a very attractive proposition for investors, now more so than ever.