JLL reports that growth in BTR will see changes in how sector is valued and graded
BTR has the potential to increase 10 times in size if USA levels of market penetration in the private rented sector are achieved.
Build To Rent (BTR) has the scope to become the largest of the living sectors, with supply increasing by over 50% per annum since 2015 and the potential for a mature market to reach £20 billion per annum in transactions, according to the latest research from JLL.
The Living space accounted for 22% of all commercial real estate investment in the UK in 2020, cementing a steady upward trend over the past decade that could see the BTR sector increase 10 times in size if USA levels of market penetration in the private rented sector are achieved, affecting how UK BTR assets are graded and valued.
Grading the growing UK BTR market
There are now over 42,400 operational BTR units in the UK, with the delivery of new BTR units increasing at an average rate of 54% per annum since 2015. Despite a further 10,000 units completing in 2020, the rate of growth stalled because of lockdown measures and social distancing. However, the trend is expected to bounce back sharply with a 65% increase in 2021, with 16,340 units set to be built. More than 20,000 units are currently due to complete from 2022 and beyond.
Owing to the range of different types of asset within the sector that are included in the definition of BTR in the UK, classification in line with the US market will enable greater transparency to the market as investor appetite continues to grow.
Building classification will therefore be determined by build quality, location and the level of amenity provision. This ranges from prime Grade A, which are purpose-built assets – accounting for just 9% of all supply, although in time this share will increase given that this group account for 14% of units under construction. Grade B are a combination of new purpose-built assets and older conversions, whilst Class C units are typically smaller, non-purpose-built legacy schemes. This is reflected by the fact that they account for 10% of all operational units but just 2% of the development pipeline.
Valuing the BTR space – from vacant possession value to income
The growth of BTR has led to a change in thinking around valuing this type of asset with income becoming the biggest driver of value. Vacant possession value is still an important consideration for many investors and debt providers. However, as the sector continues to evolve and mature, it is likely that income will continue to be the biggest driver of value whilst less emphasis will be placed on the significance of the underlying breakup value. Over time we therefore expect more of an alignment to the way in which investments are priced in the more mature US market. We also anticipate that JLL research will demonstrate that the notion of a break up exit is increasingly less relevant in the UK market, as the role of income in driving value becomes ever more engrained.
Simon Scott, Lead Director – Living Capital Markets at JLL, said:
“Despite a shift towards professionally managed, purpose-built living assets in central locations, institutional scale BTR assets remain a minor part of the private rented sector at present. These assets do however have a key role to play in increasing housing supply and providing high quality, modern purpose-built housing solutions in a way that the private home ownership market has been unable to do.
“With the opportunity for up to £20 billion of investment per annum, BTR has the scope to become the largest of the living sectors, and as such how it is graded and valued in the UK needs to become more transparent.”
Matthew Green, Head of Residential Development Valuation at JLL said:
“The growth of BTR as a sector favoured by institutions has led in recent years to an evolution in how BTR assets are priced. An income approach to valuation has taken centre stage over traditional methods of appraisal, however vacant possession value on a break-up basis is still an important consideration for many investors and debt providers.
“As the sector continues to evolve and mature, it is likely that income will continue to be the biggest driver of value whilst less emphasis will be placed on the significance of the underlying breakup value. Over time we therefore expect more of an alignment to the way in which investments are priced in the more mature US market.”
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.6 billion in 2020, operations in over 80 countries and a global workforce of more than 92,000 as of June 30, 2021. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.