The Subplot | BTR skids, hotels, Gove

Welcome to The Subplot, your regular slice of commentary on the business and property market from across the North of England.

THIS WEEK

• Build-to-rent: hold on tight, things move quick-quick-slow when investors are in the driving seat
• Elevator pitch: your rundown of what is going up, and what is heading down

FOLLOW THE MONEY

Is BTR moving too fast? The build-to-rent sector has been on an investor-driven high-speed chase for eight years. But inflation and weird debt markets have caused it to hit the brakes. Could some locations and price points spin out of control?

BTR is still a microscopic part of the UK housing market but an acknowledged success. Investors have been pilling in, tempted by long-dated secure income. But combine the wrong price point with the wrong location and you have a car crash waiting to happen, one that might have been avoided if today’s skiddy economic conditions weren’t in the way.

It’s in the plans

To see what’s going on look at the planning pipeline. It is fairly widely agreed that there’s more BTR units going through planning now than there was 12 months ago. Analysis by the British Property Federation shows the total number of BTR homes in planning, under construction, or completed increased by 14% in 2022, rising from 212,916 to 242,548, but economic headwinds are stalling activity.

It is also agreed that this surge in planning activity was caused by investor-push rather than consumer-pull. In other words, the bulging early-stage supply pipeline is because developers are trying to find ways to satisfy investor demand.

We heart investors

Robert Sloss is chief executive at developer HUB. Earlier this month Bridges Fund Management and HUB agreed a £108m forward-funding deal in the UK with Canadian real estate investment company Realstar. As part of the deal, Realstar, the owner of the UNCLE residential rental brand, will deliver nearly 1,000 units in Leeds.

It’s all changed

Sloss could not be more positive about BTR if he tried. But he says there has been a change from the early 2022 market in which debt was cheap and helped viability, to one in which it is expensive and a drag. The higher cost of finance, and of building, has also taken a toll. The result, he says, is “a crunch of development activity rather than planning activity.” In other words, developers are prepping sites for development in the hope of tempting investors.

Look but don’t touch

Are investors biting? “The funding market slowed dramatically late last year,” says Sloss. “There were just two in the final quarter, including ours in Leeds. Most institutions are watching and looking for at least the next six months, maybe 12 months, and the ones who are active are the ones who don’t require debt.” Bobby Barnett, residential capital markets supremo at Gerald Eve, says that’s over-egging it. By Q2 we’ll see the investors begin to move. But the point remains. As Sloss says: “There’s a lot of debate about what happens now.”

Lots of opportunities

The issue is that a hefty volume of consented schemes is piling up in some locations. This gives investors – who already had a strong hand – an even stronger hand. “I don’t think you’ll get a surplus of juicy planning consents in London but in some other places, maybe Leeds, there will be consents and less development, and viability is already tough right now in Leeds. So we’ll see schemes with planning waiting to be funded.” That is not encouraging for developers carrying big upfront land and planning costs.

And then there’s this

When investors jump, the risk is oversupply either in some cities or microlocations within cities, or at some price-points, particularly at the top of the market. But that can be mitigated, as Moda shows. Moda Living has pretty much set the tone at the top of the market with schemes in Manchester and Liverpool, and now expanding in Leeds (where New York Square opened in October 2022) and Heworth Green in York. James Blakey, planning director of Moda Living, says he’s as busy as ever with perhaps 6,000 units in various stages of planning or pre-application. There’s a widening pool of potential funders “but the issue is the time it takes for capital to be deployed,” says Blakey, adding that the schemes that thrive in this new world will be those where developers took the time to get things right. To win investor backing, and local authority approval, requires the same thing, he says: more focus on ESG and social value.

Local heroes

There are also local supply and demand equations to take into account. “Leeds saw very little delivery in the 10 years to 2018, now perhaps we’ll see a spike in delivery in 2024. But the investor risks are low,” says Allsop specialist Sam Verity. L&G’s decision to return to the market with a £500m BTR punt maybe proves he’s right.

Also Newcastle

In younger markets the opportunities fiercely outweigh the risks, providing nobody goes overboard on the high-end products. Stephen Beech is about to lead Beech Holdings into a 200-unit scheme in Newcastle. “Given our standing start in the city, we have already had over 700 enquiries in three weeks for this development, with nearly 10% of the development already let. If those numbers don’t point to a buoyant market, then I’m not sure what does,” he insists.

Keep on driving

Gerald Eve’s Barnett says to remember that the investment put on hold last autumn is just that – on hold. The money didn’t vanish. And, anyway, most potential BTR investors aren’t looking for flash-bang returns on their investment. “The oversupply risks aren’t like they are in, say, the office market. We won’t get voids, or things failing to let. We might see rental growth drop from say 5% to 1% but that’s not Armageddon. It’s still producing an income for investors looking for low and steady returns,” he says. In other words, everyone should hold their nerve.

Even so, wise drivers – and passengers – will keep an eye on those local skid risks.

Want to learn more about the BTR market? Place is hosting its North West Rental Market conference on 4 May.

ELEVATOR PITCH

Summon the concierge, we want to go up! Yes, luxury hotel investment is elevating. Whether government plans to speed infrastructure are also on the move is more debatable.

Luxury hotels

Leeds’ 232-bed Queens Hotel changed hands for £53m after Aprirose unloaded the much-refurbished property to European investor Pandox. The yield is said to be north of 9% which will make the new owners happy. But the hotel sector is in a funny place. The customers are back, but the investors aren’t entirely and some mid-range hotels could be in serious trouble. Next week Subplot will take a look behind the reception desk to find out what’s going on.

Infrastructure projects

Later today Michael Gove is expected to publish a new national action plan to speed up major infrastructure projects: it got pulled on Tuesday, so fingers crossed it makes it over the line this time. The aim is to cut the amount of paperwork, and growing length and complexity, of the application process and is likely to mean clearer guidance from ministers on what counts as vital, and what doesn’t, and how you prove it to the satisfaction of the authorities. All well and good, but it’s not planning that really screws things up, its ministerial decision-making about spending. So two cheers are due, but not the full three.