In Search of ScaleApril 2019
One of the biggest challenges facing operators in the new BTR market in the UK at present is how to create scale in their business. Recent weeks have seen two fascinating and novel approaches to this challenge; partnering with developers and simple acquisitions.
At the start of last month, Telford Homes told us that they anticipate that 50% of the units they will deliver this year would be for rental. Just a few weeks later they let us know how they will finance them. They are partnering with seasoned BTR investors, Invesco Real Estate and M&G Real Estate. M&G will be forward funding schemes with less than 200 units with Invesco coming into fund the larger developments. In capital terms, 200 units is likely to represent deals of between £75 million and £100 million. With Telford homes existing land-bank to draw upon we can anticipate some 1,000 units being delivered in the next couple of years.
Towards the end of last year, we saw a deal between Blackstone and Sage Housing, a housing association operator, to fund the delivery of affordable housing in the UK. Blackstone needed scale in the operation and couldn't afford to wait to build its own portfolio. This route could see them involved in the delivery of more than 20,000 homes over the next 5 years. Funding an existing operator clearly appeared an innovative, if mildly controversial, way of investing in UK housing at scale, quickly.
In January, CBRE Global Investors announced it, too, will partner with registered providers. Its CBRE UK Affordable Housing Fund has held a first close of £250 million with 13 institutional investors, including social investment institution The Big Society Capital. The chosen registered providers will manage the assets and will be responsible for the rental income, maintenance and property management.
The other way of achieving scale is, quite simply, by buying it. Clearly, it takes time to build scale organically by developing out your own units. American giant Cortland announced in March that it is intending to acquire the £400 million Dandara regional rental portfolio. This will give them a further 2,000 units across the UK, in cities like Manchester Birmingham and Leeds. There is also an option to buy further sites in the future in Glasgow and Aberdeen, to deliver another 3,000 units
Cortland is looking to have 50-65% of their units in outer London and the M25, with the remainder in regional centres. It plans to build a £4 billion pipeline of 10,000 homes across the UK.
Invesco has already used this approach having acquired the Platform portfolio from Westrock; a £116 million, 580 unit portfolio split across five buildings, in March 2017.
In the light of all this activity, Geraghty Taylor has been busy providing due diligence advice to help clients review existing built schemes, as well as schemes moving to planning, to review their suitability for BTR operations. The experience built up, in delivering 10%+ of the existing built stock of BTR, positions us well to add value and suggest interventions to get the most out of investments.
No doubt, these deals will herald many more where existing owners looking to cash in their hard-earned profits from creating rental portfolios and we will see other volume house builders and Housing Associations forming similar funding relationships to Telford Homes with other BTR investors in the future.
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