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£25B Of Investor Capital Circles SFR As Housebuilders Look To Offload Units

As the UK residential sector expands, the stars are aligning for a Cinderella living category that has already enjoyed record investment in 2023.

This year has marked what adviser Savills called a “step change” in the pace of single-family rental housing investment in the UK, with circa £1B deployed in the year to September and more deals being signed after a slowdown in housing sales prompted residential developers to revisit volume sales.

And the potential buyers don’t get much bigger, with the likes of Carlyle and Blackstone entering the UK’s SFR market in 2023, growing a relatively nascent asset class into a circa £3B-a-year sector. That could yet prove the tip of the iceberg, with investors potentially sitting on as much as £25B of dry powder to spend on single-family rental homes, according to Savills.

So just how far could the market grow next year as investors vie to take up excess building stock, and will housebuilders weave SFR into their long-term strategies or use investors as a short-term fix?

The single-family home market could be worth £25B in the UK.

“The SFR market has been going from strength to strength,” Colliers Head of Northern Residential Capital Markets Mike Gorman said. “Those that are long-established in the market have been very active, while we’ve seen new money from the U.S., Asia Pacific and various national funds.”

There have been plenty of headline deals, including Project Domus, the sale by Goldman Sachs of 918 homes to PGIM, plus a portfolio sale of 604 units by Barratt Developments to Citra LivingUBS completed a £110M recapitalisation of 560 single-family rental units developed and managed by Placefirst, and Avant Homes, advised by Colliers, recently completed the sale of 306 new homes across eight developments to single-family housing provider Sigma Capital Group for £59.5M.

Carlyle entered the market in June, buying 288 homes from listed housebuilder MJ Gleeson for £50M in a joint venture with SFR specialist Gatehouse Investment Management, while hedge fund Man GPM agreed to a deal with Taylor Wimpey to forward-fund development of 96 single-family homes for rent at its Stanhope Gardens project in Aldershot, Hampshire.

More recently, Blackstone bought a huge portfolio of yet-to-be-built houses from homebuilder Vistry for £819M in a partnership agreement with Leaf Living and Sage Homes, both of which are backed by Blackstone-managed funds, plus Regis Group

And when listed housebuilder Crest Nicholson issued a profit warning in the summer, it said that it was “negotiating several bulk deals,” while Vistry has ramped up its sales to SFR specialists and said that partnerships will become part of its core strategy.

SFR development has also shifted toward the Midlands and the south, where housing demand is most acute. Some 95% of investors are targeting locations in the south-east, with 85% targeting the Midlands and 80% targeting the south-west, according to Savills.

“Investment strategies for SFR are diversifying as different sources of capital, from institutional investors to private equity-backed players, seek to establish their niches and capitalise on this burgeoning sub-sector,” Savills Director, Residential Investment Research & Strategy Jacqui Daly said in a single-family housing report released last month. “Funding models are becoming increasingly sophisticated, ranging from funding requirements for fully bespoke and future-proofed schemes, through to bulk transactions for short-term income-producing portfolios.”

Colliers' Gorman said that although the market will continue to grow in 2024, the profile of the buyers and sellers will evolve as housebuilders consolidate their estates and either exit or develop the SFR component of their business strategies.

“Right now, some of the product available has come from housebuilders who are apprehensive about holding too much stock given the economic climate, and that part of the business is to some extent discount-driven,” he said. “So 12 months from now, it’s likely that those players will have consolidated and will largely be out of the market and focused on their build-to-sell businesses. For others, it will become a more integral part of their longer-term strategy.”

Gorman said the SFR sector offers opportunities for larger regional and smaller housebuilders to grow and to spread their risk by operating multiple business strands on the same site, especially given the strong occupational market.

Indeed, there is a growing appetite for smaller portfolios among some of the specialist investors and debt providers. Vistry Group is delivering 14 three-bedroom homes in Waltham Forest, with Picture Living, a division of Places for People's Thriving Investments, committing £20M to forward-fund this and a second scheme in St. Neots, Cambridgeshire, by Durkan Homes.

Picture Living has assets under management of around £350M and a portfolio in the region of 1,800 single-family homes and apartments, including more than 200 under construction.

“Like any investment, there are headwinds you've got to be aware of, but we're very positive for where we're at, in a sector whereby people are invested and happy to be invested in and haven't necessarily struggled to hit returns over the last few years because the market is moving in their favour,” Picture Living Fund Manager Jamie Younger said. “It works for a lot of investors, and hence it's attracting more interest.”

He said that from an investor's perspective, there has been a learning process about operational businesses, which started with student housing and is now leading to greater willingness to invest in SFR.

“They have their risks, operational businesses, but also have their benefits. in terms of rented residential, the hedge against inflation, the annual uplift, diversification,” he said. “With sales rates down as a function of people not getting mortgages, there just aren't the number of properties available for people to rent, and so you've got a little bit of a perfect storm.”

The question for the SFR market is whether housebuilders will remain keen after they have divested excess stock.

Like Gorman, Younger said some housebuilders will use the SFR sector as a stopgap, while others will commit to the sector as a way of diversifying income streams.

“On the buy side, we are a solution for housebuilders at the moment. So looking forward through to 2024, 2025, will we remain as attractive? I certainly hope so,” he said. “But I'm also very aware that if house price growth starts and the weekly sales rate increases, then a lot of housebuilders won't be picking up the phone to us.

“If I was an SME housebuilder and somebody said that in nine months I could sell all my 30 houses for £250K each or I could sell it in bulk now for £225K, I'm going to wait. But if I'm a bulk housebuilder who's doing 7,500 to 10,000 units a year, then the idea of a mix with single-family or multifamily to rent is more attractive. You can afford to forward-fund deals. Maybe it's helping your financing and you've derisked immediately.”

Long Harbour, a specialist real estate investment, development and management firm, is another SFR advocate and appointed Jack Spearman earlier this year as managing director of its platform, which targets residential assets across the UK. Long Harbour’s property management brand, Way of Life, is being used across the single-family portfolio.    

“While still a relatively nascent market, SFR is rapidly growing and is set to play a significant role in addressing the current housing crisis in the UK,” Spearman said. “The sector is attracting considerable interest from foreign and domestic investors, which is critical for the UK’s social infrastructure, and investors are understandably attracted to a fundamentally undersupplied market with an overwhelming demand for affordable, high-quality, modern and sustainable homes.”

Nearly two-thirds of investors are targeting portfolios over £1B, according to a survey by Savills, with investors looking to commit more than £25B in total.

The majority are targeting portfolios with 2,500 homes or more, with nearly half looking for portfolios between 2,500 and 5,000 homes and a third looking at 5,000-plus-home portfolios.

With robust and lengthening occupational demand as tenants pause on entering the mortgage market, along with willing sellers and an increasing pool of buyers, the sector has all the components to continue its growth trajectory. That, in turn, could transform it from a marriage of convenience to a long-term play.

“For a housebuilder, you can have your Section 106 affordable housing, your owner-occupier and your SFR components all operating together within the same development,” Colliers' Gorman said. “That can help smooth out some of the boom-and-bust cycles we see in the housing sector.”