21 July 2022
What's the fuss about Build to Rent?
A well-established part of the North American real-estate market, build-to-rent (BtR) schemes have been relatively rare in Europe. Until recently, that is. Interest and investment is now hotting up, while the type of schemes available is moving beyond the typical landmark projects in major cities. So what is the buzz about BtR all about, and what are the insurance implications?
Today’s Big Thing
The build-to-rent (BtR) market is generating a lot of buzz in the real-estate investment community at the moment. In the UK, for example, BtR has been the fastest growing sector in the real-estate market in recent years, racking up more than €20 billion in new investment over the past five years, and achieving a 50% growth per year since 2015.
This ranks the UK just behind Germany as the leading destination for BtR investment. Europe’s largest economy has seen investment of €23 billion over the last five years. France and Spain lag behind, but interest there is growing.1
Overall, the European BtR market is expected to expand rapidly in coming years driven by:
- Increasing interest from institutional investors in building long-term residential portfolios.
- A need to increase the housing supply, particularly in high-demand urban areas.
- Rising house prices.
- A decreasing interest in home ownership among Millennials and Generation Z.
The potential is therefore significant. As some indicator of the scale of the opportunity: in the UK, BtR still only represents about 1.4% of all households in the private rented sector (PRS), whereas it accounts for 12% of the PRS market in the US.2
This all begs the simple question: what exactly is BtR, and what distinguishes it from the traditional PRS market.
Build to Rent: An Explainer
The European BtR market essentially comprises of purpose new-build apartment blocks that are purpose built for the rental sector (in the UK, they must have a minimum of 50 residential units). These blocks are owned and maintained by a single landlord, and will often provide additional onsite amenities, e.g., gardens or roof terraces, concierge services, gyms and swimming pools, work spaces, parking/bike storage, etc.3
Thus far, the focus has generally been on multi-occupancy buildings in major cities. In the UK, London accounts for about 50% of current developments; Birmingham and Manchester are also popular. It’s a similar story in France and Spain, where Paris and Madrid both account for more than half of BtR investment. German BtR is less concentrated around the capital, although the Berlin-Brandenburg region still leads the way with more than 25% of total investment; Frankfurt and Hamburg have also seen significant BtR development.4
In the UK, however, the sector is also now expanding into larger provincial towns – such as M&G Real Estate’s Thames Quarter development in Reading – as local authorities seek to improve housing provision, and central government looks to shift resources to the regions under its Levelling Up agenda. Investors have also begun to take an interest in single-family units, following the lead of the US, where demand for planned communities of single-family houses, designed and built specifically for rental, is growing rapidly.
Recent developments in the UK include:
· Apache Capital launching a platform to develop, own and operate over 3000 single-family homes that are purpose-built and designed for rent.
· Goldman Sachs and Urban&Civic announcing an agreement to deliver up to 700 single-family BtR homes, with the first project to be delivered at Houlton, Rugby.
· Legal & General announcing it had acquired a new BtR scheme near Peterborough for £25 million. The development comprises two, three and four bedroom houses.
· Aviva Investors and Packaged Living announcing a deal to acquire and develop 195 homes in Telford, as part of a partnership between the two companies to develop a portfolio of single-family rental properties in the UK.
Build to Rent: The Insurance Implications
After a long period of hard market conditions, the UK insurance market still remains skeptical of the residential real-estate market in general. And it’s also true that BtR developments pose a wider range and variety of risks than other forms of residential development. These must be considered in any risk assessment – from cyberattack on blocks boasting smart home technology, to the risks posed by onsite restaurants and coffee shops.
Given the emphasis on operation, it is also important to understand tenant expectations when it comes to services, maintenance and upkeep. Given the rental premiums generally paid for BtR properties, expectations will be higher than traditional PRS properties, and their fulfilment will affect retention rates. If contracting management of the property to third-party, it is important the contractor also understands and is able to deliver the quality of service required.
On the flip side, BtR tenancies tend to be longer-term than traditional PRS properties, providing greater security of income. And as most BtR schemes are purpose built, there are opportunities to de-risk and future-proof developments, e.g., by designing-in digital infrastructure and sustainability at an early stage to pre-empt future regulatory and consumer demand, and so avoid disruptive retrofits later.
With its London-based real-estate team and specialists across the real-estate sector, Gallagher is ideally situated to advise on the detailed insurance implications of any specific project, and to ensure appropriate and sufficient coverage is obtained.
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