US raiders eye rise of British build-to-rent market

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Atlantic build to rent model comes to UK

New York-based KKR’s involvement might come as a surprise. The firm, founded by billionaires Henry Kravis and George Roberts, made a name for itself as a ruthless corporate raider that pioneered leveraged buyouts – a far cry from the cosy image cultivated by an industry seeking to attract liberal millennials.

But industry sources say KKR, immortalised in Bryan Burrough and John Helyar’s book Barbarians at Gate, is unlikely to change the rental sector’s softer approach.

One source at a rival developer says: “[KKR are] unlikely to try and turn things on their head as it’s all working.

“The marketing and lower margin approach works as typically tenants are very eager to stay in these properties. I can’t see them cutting costs and raising margins – at least not immediately.”

Experts say investor interest from across the Atlantic comes from experience.

Build to rent may still be considered an alternative investment market in Britain, with volumes significantly lower than logistics or office real estate markets, but hedge funds and private equity investors are betting that will change rapidly.

Annabel Turbutt-Day, of South Carolina-based developer Greystar, says the demand to buy into build-to-rent in the US will almost certainly be followed by Brits.

“North American investors are familiar with the institutional rental housing market given its maturity in the US, and they can see the future opportunity in the UK where the market still has plenty of room to grow,” she says.

“Demand for housing is strong, so the build-to-rent sector offers relatively safe harbour for global investors, particularly against the backdrop of recent uncertainty in the office and retail real estate sectors post-pandemic.”

She adds: “The UK market has grown strongly in recent years, but it is still just over a third of the US private rented sector. 

“We do not need to convert people to renting, we just need to provide a better service to people who choose or need to rent. The competition from the buy-to-let sector is weak in terms of asset quality, amenity provision and security of tenure.”

Obstacles remain

Planning issues could still threaten to choke development, however. Kurt Mueller at residential rental developer Grainger said last year that the company had struggled to get a new block in North London through planning for 13 years.

Johnny Caddick, chief executive at Moda Living, agrees that the lack of approvals for big schemes so far means the market for trading large blocks of flats, as exists in other countries, has not fully established in the UK.

“One challenge the sector faces from an investment perspective is that there is a shortage of quality assets in the UK market, which is yet to reach full maturity,” he says. 

“Investors are overcoming this challenge by partnering with businesses that are able to deliver their own quality stock. Getting involved in the projects from the ground up comes with its own associated risks, but ultimately pays off when they have stabilised modern assets in an underprovided market.”

Turbett-Day, meanwhile, says the biggest put off for investors looking at the British market is a lack of space.

“Land supply is a perennial issue for developers,” she says. “It seems unlikely there will be enough land to satisfy demand for the foreseeable future.”

That being said, she still believes the industry has room to grow and attract more money. 

“At the moment, institutional investors have the opportunity to buy into a supply-constrained market, at the bottom of the rental cycle, without too much exposure to the business cycle and other risk factors,” Turbett-Day says.

“We’re seeing strong occupancy at assets, fast lease ups and positive online reviews indicating that there is increasing demand for the product.”

The rise of buildings like the Lexington might represent the fracturing of the British dream of mass home ownership. But US investors are hoping they are a sign of a bigger transformation to come.

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