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Demographics, Demand And Bulk Deals Power SFR To New Heights

CBRE Investment Management Director Ann Xu and her team gave themselves an early Christmas present in 2023: a hatful of single-family rental deals. 

“A lot of investors like this space but were standing and watching and waiting for price discovery,” Xu told the audience at Bisnow’s UK Single-Family Rental Summit. “That was a great opportunity for us, and we were finalising deals right up until 22 December. And now in Q1, we’re very much on the lookout for new opportunities and allocating more capital.”

The UK SFR market had a breakout year in 2023, with investment reaching £1.9B, according to data from Savills, a huge increase on the £360M invested in 2022.

Devonshires' Triya Maicha, Packaged Living's Eleanor Fiennes, Casa by Moda's Sarah Nelson, Leaf Living's Charlie Adcock, Dataloft's Sandra Jones and Utopi's Muir Baxter-Yiannou

Last year was a perfect confluence of events. The sharp rise in interest rates stalled the housing market, meaning more people than ever needed to rent rather than buy. Increasing demand pushed up rents. And that same phenomenon enticed housebuilders to sell to SFR investors through bulk deals. 

But the sector has the fundamental qualities to continue prospering, panellists said at the event, held at Regent’s University and attended by more than 200 delegates.

Those supply and demand dynamics aren’t going to dissipate anytime soon. Housebuilders are likely to continue to be a good source of deals, and the demographic makeup of tenants is proving highly desirable for investors looking for secure income. 

Casa by Moda Operations Director Sarah Nelson shared some data about the residents of its first operational scheme, a 156-home development in Glasgow. The average household income of its residents is £66K, about 25% higher than the £53K average income of renter households in Glasgow.

That points to the wealthier-than-average demographic that rents in the sector. Leaf Living Acquisition Manager Charlie Adcock said that because the company’s portfolio is concentrated in the south-east of England, its average income is even higher. 

Attracting a wealthier demographic makes rent more sustainable and secure, the panellists said, especially since SFR assets have lower build costs and fewer amenities than multifamily build-to-rent. Those assets also have more suburban locations and tend to have lower rents than city-centre BTR. Almost half of Casa by Moda’s residents were families, and 30% have pets, Nelson added. 

Even so, Xu pointed out that the rental increases seen in 2023, which in some parts of the country were 20% or more, would not be sustainable. Rental growth should be more in line with wage growth, with CBRE factoring in rises of closer to 2% to 3% a year, she said. 

2023 was the year of the partnership between SFR and housebuilders keen to find buyers for homes that were already built or committed in their development pipeline. The biggest such example was Blackstone’s purchase of 2,915 homes from Vistry for £819M in November. Of those, 1,522 will be operated by Leaf, which Blackstone owns. 

Citra Living, the rented residential company owned by Lloyds Banking Group,  added 1,600 homes to its pipeline last year, taking its total committed pipeline to 3,000, a huge single-year jump, CEO Andy Hutchinson said. 

The immediate appeal for SFR investors is clear. Rather than having to take schemes through the full process of site selection, planning and development, they can buy in bulk after a lot of that hard work is done. The fact that the market for sales to private buyers is tough right now also means that the prices being sought are not as high as they would have been 18 months ago.

Partnerships between housebuilders and SFR investors can give both sides long-term security, a stable source of supply and demand that is mutually beneficial. 

“It fundamentally underpins certainty. It enables early engagement and efficiency, quality and innovation,” Vistry Director Kathryn Pennington said. “So from a certain perspective, this is the most valuable thing it's going to have, as providers to plan your business properly, both from a business perspective but also in terms of design.”

Pennington said that until now, SFR homes had been shoehorned into wider developments as an afterthought, such that homes and communities were not being designed specifically with renters in mind. Future developments are more likely to be planned along a model of “a third, a third, a third,” she said, referring to a formula of one-third homes for sale, one-third available at market rents and one-third available at affordable rents.

The certainty that having a buyer of SFR product makes this possible, Pennington said.

“If we want long-term mixed and sustainable communities, and I strongly believe we do, then those two-way partnerships are the way to do that,” she said.