Why build to rent has remained resilient despite Covid-19

Sponsored article: Build to Rent has weathered the pandemic resiliently. With rent collection and occupancy remaining high, and economic trends looking supportive, James Sparshott and Dan Batterton believe that the sector has many compelling features for the LGPS.

2020 was a dramatic year for all investors and, we believe, many clients. In particular, those with longer time horizons will be reconsidering their portfolios not only with an eye on returns, but also on volatility. In this blog, we look at how the build to rent (BTR) sector has fared so far during the pandemic, and what risks and opportunities may lie ahead

Rentals and resilience

National and local lockdowns have had a far-reaching impact on businesses and individuals, with knock-on effects reverberating through the real estate sector.

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While rental receipts have fallen for much of the market during the pandemic, collection levels and occupancy have remained high for BTR; Knight Frank estimate that 95% of rent in the BTR sector was collected in the second quarter of 2020, compared with average collection levels below 80% in the commercial sector.

Records from recessions

Whilst the full economic fall-out from the pandemic may not yet have filtered through, there are reasons to be reassured of BTR’s resilience.

Residential rental investment has typically remained robust in periods of uncertainty: during the 2008/09 financial crisis, occupancy levels in the UK residential sector only fell to 96%, 2% lower than long-term average.

As history shows, recessionary periods are typically followed by periods of increased demand for rental homes, as uncertainty and economic conditions deter households from making ‘big ticket’ purchases like new homes.

Looking ahead

We believe that the BTR sector is continuing to prove its resilience. While we are not yet out of the woods, the existing imbalance between demand and supply should continue to support growth.

We have identified a number of other factors at play which, in our opinion, should support the BTR sector, with assets benefitting from some household behavioural trends and preferences, emerging through the pandemic. Examples include the increased likelihood of needing a functional space to work, as we move to working more frequently from home, and the desire to reduce the use of public transport.

These trends and preferences are well catered for in BTR schemes, with dedicated co-working amenity spaces and assets located close to local cultural and leisure amenities

Through the medium to long term, the mismatch between housing demand and supply in the UK should continue to support demand in BTR, and the pandemic is driving secular changes and a fundamental rethink of many areas across the real estate sector.

A constant throughout the crisis, however, has been a reinforcement of the need and importance of quality homes. This need continues to be underserved in the UK and will not have been helped by the negative economic impact of the pandemic.

With all these push and pull factors at play, we believe BTR will continue to play an important role in meeting that need, and for investors such as the LGPS, with long time horizons and a requirement for diversified returns, we believe that the sector could be a compelling investment opportunity.

James Sparshott is head of local authorities, LGIM & Dan Batterton, fund manager, BTR, LGIM Real Assets.

Photo by Vincent Wright on Unsplash

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