Robin Goodchild

Those interested in UK Build-to-Rent (‘BTR’) assets are keen to find out at what rate they can expect income to increase. Here we share the prospects on this, and what to consider for this young asset class.

Arguably, the key metric for valuing any investment is the expected rate at which income will increase, whether in form of dividend, bond coupon or rent. The faster the expected rate of increase, the lower the yield an investor should be willing to pay for that income stream.

UK BTR could potentially see quite fast income growth, if MSCI data can be believed. Gross rental income in the UK has increased at 4.4% pa since 2000 for residential property, over twice the rate of all commercial property (2.1% pa) as well as over 1%point ahead of inflation (which averaged 2.8%).

But can these numbers be relied upon given that ‘Build-to-Rent’ is a new style of residential investing which hasn’t existed before the last few years? Moreover, the data are for ‘gross rents’.

While gross rent is a relevant metric for UK commercial properties let on Full Repairing & Insuring (‘FRI’) leases, residential landlords focus on Net Operating Income (‘NOI’) because they have a variety of costs to pay from the gross rents. Outside the UK, where the FRI or ‘triple net’ lease is rare, investors tend to focus on NOI for all property types, and the contrast is not as great between commercial and residential property ‘gross-to-net’.

So where can reliable data be found to provide BTR investors in the UK with some guidance about expected NOI growth? The US is the obvious location with over 25 years of institutional investing experience in ‘multi-family’ properties. Over this period, residential NOI has increased at 3.5% pa with inflation growing at 2.2% pa.

Given that supply of new development is mostly not constrained in most parts of the US, certainly relative to the UK, it is not unreasonable to expect that UK NOI should be able to grow at least at a similar rate. My former colleagues at LaSalle in Chicago (with whom I still collaborate) have some caveats about the data used here, but it is a fair representation of the consistent growth achievable.

UK wages and salaries are an important determinant of rental growth. Recently wage growth has struggled even to match inflation, but assuming austerity does end eventually, then the market should be able to generate above-inflation growth. So, all long-term investors should consider the UK Build-to-Rent sector an attractive investment.

Dr. Robin Goodchild is one of the trainers of the UK Institutional PRS courses for service providers, investors already investing in UK PRS or those considering investing in PRS or BTR. See https://www.propertyoverview.co.uk/prs-courses

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