Investors Grab Unique Moment To Buy Discount BTR Assets Even As Rents Climb

Property investors from around the world are competing to take advantage of a narrow but profitable window — the chance to buy quality rented residential assets at a discount to replacement cost with the prospect of strong rental growth. 

The sharp slowdown in build-to-rent development in the UK is a problem for a nation that isn’t building enough homes, which is pushing up housing costs. Institutional investors' wariness about real estate of all stripes is worsening the shortage.

But it means investors are refocusing their attention on buying existing BTR assets where they can, and they have the possibility of outsized returns. 

Deals are few and far between, but there is at least one £1B-plus trade in the market right now, with more coming down the tracks. 

“If you can buy good-quality existing assets at or below replacement cost and at an attractive yield on cost that you can't build for today, then to me, that just seems like a pretty good long-term bet,” Ridgeback Group partner George Bossom told Bisnow. 

The biggest deal in the market right now is the sale of housing association L&Q’s BTR business, which consists of 3,147 homes across 52 schemes in and around London and is almost fully let. Blackstone, Kennedy Wilson, Pelham Partners and LRC all put in offers, but Morgan Stanley Real Estate Investing is understood to be the preferred bidder, in a partnership with Ridgeback. 

Bossom declined to comment on the pending deal.

Fellow London housing association Notting Hill Genesis has appointed Deloitte and Savills to offload £1B of properties owned by its Folio private rental business, in a process likely to attract many of the same parties. 

In terms of individual assets, last week Greystar paid £170M for Barking Wharf, a 595-home BTR scheme in east London. Earlier this year, KKR bought the 424-apartment Slate Yard complex in the Salford Quays area of Greater Manchester, after buying two BTR assets totalling 490 homes in Wembley Park from Quintain for £250M last year. 

Hines in July bought the 324-apartment Solasta Riverside BTR scheme in Glasgow.

Ridgeback, which was set up in 2018 by Bossom and former Helical executive Duncan Walker, has a portfolio of 4,500 BTR apartments in the UK, 3,000 of which it developed or is developing itself, with the rest bought from other developers. Its partners include the Alberta Investment Management Corporation, or AIMCo, the Canadian pension fund with which it bought the 241-apartment Mitre Yard scheme in north Kensington earlier this year. 

Ridgeback also paid £126M for the 257-unit Equipment Works BTR scheme in Walthamstow, north-east London, in February. 

Ridgeback pivoted from building to buying in 2022, Bossom said, because of a perfect storm of rising development and financing costs, uncertainty in build time frames caused by the new Building Safety Regulator, and falling capital values caused by rising interest rates. 

“Land is typically such a small portion of the gross development value anyway, even if land is written down to zero, I still don't think that you're able to build to a good enough yield on cost to reflect the risk that you go through to do that,” Bossom said of the decision. 

Instead, Ridgeback and its partners are buying properties for less than they could be built for at prices lower than they have been for the past few years because institutional investors with a lower cost of capital are not buyers right now, and there are fewer buyers generally for assets above £100M. 

In London, new BTR assets might have traded at yields of 3.5% to 3.75% a couple of years ago but are now trading at about 4.5%, he estimated. He pointed to Equipment Works as a scheme that has good amenities and is well let but was bought for less than replacement cost. 

Lower values come despite the fact that rental growth should be strong for the foreseeable future, Bossom said, as long the rents being sought are not excessive — the lack of supply coming through in both the BTR world and the London housing market more generally should support future rental growth. 

“If there's no more supply coming, which we're pretty adamant there won't be, once the tail that's already in construction is finished, then our view is surely existing assets are going to become more valuable,” he said.

The trade is not an easy one by any means. Yields have risen but remain below the all-in cost of borrowing, meaning for investors that use debt, acquisitions are cash-flow-negative on Day 1. 

“Effectively, every pound of rent you get, you're using that to pay debt,” Pelham Partners Chairman Roger Orf said. “And you're betting that market rents will go to compensate you for the negative leverage, but you start out by running up the down escalator.”

Pelham owns more than 20,000 multifamily units in the U.S., a market in which it has invested for more than 20 years, buying and holding for the long term. Orf estimated that the company has sold less than 5% of the units it has ever bought. Profits made on rents and sales are reinvested to keep apartments and amenities up to scratch and appealing to investors. 

The company is now looking to build up a portfolio in the UK, where the dynamics in favour of rental housing are similar. Economic growth is not as high here, but supply of new apartments is also scarcer, because planning permissions are harder to obtain than in many parts of the U.S. 

The company bought a trio of buildings at Quintain’s Wembley Park, and in Manchester and Reading, Pelham is converting old offices to apartments. 

Orf said the issue of negative leverage can be overcome if investors hold assets for the long term, because rents can rise, meaning the income becomes greater than the interest being paid. But it is difficult to buy if you have a short time horizon, he said. 

“We all know what the dynamics are in terms of the scarcity of supply, but the elephant in the room is affordability,” he said, echoing Bossom’s point that rents need to be reasonable for there to be room for growth. 

Another issue is scarcity of deals. The small size and immaturity of the UK BTR market mean that there are very few standing assets that have been completed, stabilised and are now ready to be traded. 

There are even fewer that are owned by companies that need to sell, at a point when the market is discounting such assets. Closed-ended funds coming to the end of their lifespans make up the biggest pool of sellers, Bossom said, with open-ended fund managers that need to sell to meet redemptions making up a smaller group. 

Housing associations that have a private rental sector division offering apartments at open-market rents are also a source of deals, as evidenced by the sales from L&Q and Notting Hill. In an ideal world, sales of existing assets will allow them to reinvest proceeds and build more affordable units.

“The driver is basically the need to free up cash to create more homes,” Thriving Investments CEO Cath Webster said. “And investing in those homes, the cost of capital for them has just increased massively.”

Housing associations are 100% debt-funded and can’t raise equity, Webster said, so the rise in interest rates means their all-in cost of capital has risen from 2% to around 6%. Selling assets is one of the few ways they have to raise cash at a price that makes building new units viable. 

Secondary trades in the BTR market are a sign of a market maturing, and even though building has slowed down hugely, it can encourage developers to build in that more data on investment sales shows them the price at which they can exit schemes.

“The UK market has matured faster than the U.S.,” Hilltop Property Partners CEO Michela Hancock said. “It really took 30 years to build the multifamily market there, and I think we've gone quicker in the UK because we weren't just starting completely from scratch.”