Views

What's the Hype with SFR ?

Single family rental has quickly progressed from hype to an alternative segment of the Living investment sector.

May 25, 2021

Single family rental has quickly progressed from hype to an alternative segment of the Living investment sector.

Increased capital allocation for the Living sectors has intensified competition to create or acquire stock across the later living, student and traditional multifamily segments. Single family rental demand has many similar characteristics that have begun to attract a lot of attention, as a result.

Demand-side fundamentals are as robust for single-family rental as any other part of the private rented sector. Building typologies represent lower-risk, lower density schemes that reduce the amount of capital tied up in the construction process and speed at which revenue starts to flow back to the investor compared with high-density build to rent.

It is also a sizeable part of the market; JLL data shows that single-family rental makes up 14% of rental homes in Europe, equating to just over 8 million properties. In Ireland it represents a staggering 67% of rental stock, in France it is 23%. In the UK it is just 7% of stock, but this still represents well over half a million dwellings.

There is clearly a significant opportunity for both investors and for renters, in a segment of the market that is structurally under-supported by quality institutional management

Market-making

Single family investors will struggle with many of the same issues that multifamily investors have elsewhere. A lack of trading stock or experienced managers to support the investment thesis is a key challenge across much of Europe.

However, several dedicated single-family investment funds and ventures have been set up in the last 12 months across the UK and Ireland, including by Legal & General, Round Hill, Packaged Living, among others.

Goldman Sachs' £150 million acquisition of nearly 1,000 homes in the Thistle portfolio was a big vote of confidence for the sector and a sign of the type of investment we can expect in the future.

In more advanced Northern European markets, including Denmark and the Netherlands, single family rental portfolios already exist and trade, albeit infrequently and often lumped in with more traditional multifamily blocks. Heimstaden’s £1.4bn purchase of HD Ejendomme in early 2021, a platform of mostly terraced houses in Denmark, reflects the growth potential of this nascent market in the UK.

Better standards

Single family rental also provides the chance to create better housing and choice for frustrated longer-term renters, particularly those with growing families that need stability for schools and social networks.

Recent moves from Irish politicians to deter institutional single family ownership shows the path may be uneven, and it will fall to the industry to make the case for this segment as an important complement to the overall mix of new homes being delivered.

The industry will need to prove that it is a net contributor to new supply, as well as a provider of quality management that will lift standards. At the same time, there will be commercial pressure to identify stock and scale up at a pace in order to satisfy hungry investor ambitions. But with two-thirds of Irish renters already living in single-family accommodation, there is a case to prioritise better rental standards.

In Q1, JLL found the Living sectors attracted the largest share of investment of all sectors in commercial real estate, surging to £16bn (€18.3bn) (21.9 billion if we include M&A/entity deals in addition). Single family rental made up just a fraction of this figure, but we expect the growth in volumes to be significant over the next few years.

The enormous appetite for investment exposure to 'beds' will continue to drive innovative models into pockets of rental demand. Where this investment provides additionality - and successfully demonstrates the benefits to renters and cautious political ranks - we will see the single family segment flourish across Europe.