The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Residential rents have a strong record of tracking CPI, and all the Fund’s sites will provide leases that are linked to it. The leases range from 1 to 7 years dependent on occupier preferences in another effort to boost demand, whilst also allowing the fund to reduce void and re-letting costs.
The key benefit of this linkage with CPI, is that in doing so it enables occupiers to project their future outgoings, which we then expect to further bolster demand and reduce occupier turnover as an additional benefit.
Even before the pandemic, there was an overreaching demand for more residential housing in the UK. According to a calculation by Savills, the net annual housing requirement of the UK is currently over 300,000 per annum3. The aim of this fund is to address a distinct gap in the UK housing market by offering high quality, sustainable, community based rental property, targeted at low to middle income households whose needs are not currently being met and where a large scale opportunity exists, whilst targeting the aforementioned returns.
The events of 2020 further underpin the fundamental investment case for build to rent investment:
The Fund’s investments will be in purpose built, quality housing stock that improves the options to rent for working households and complements existing market participants (operators launching premium rental accommodation and social housing provided by Registered Providers and Local Authorities).
A sophisticated ESG approach provides superior risk management when considered in the context of a cashflow driven investment, particularly when building and operating long term rental residential property. Regulatory, Climate, Environmental and Reputational risk can all be positively managed and used to support the generation of low volatility income.
Investors in the Fund are contributing to the development of modern buildings that are fully aligned to future regulatory targets such as Net Zero Carbon. This too also adds to a demand increase, with a large proportion of the occupier market desiring to live in energy-efficient, sustainable homes.
It hopefully goes without saying that an investment in affordable housing has a strong social focus too. Through the provision of high-quality rental accommodation to those most in need and not served through either social housing or existing premium rental accommodation, build to rent can have an impact on the UK’s housing crisis.
Residential housing can be considered a diversifier to traditional property and other real asset investments through several different means:
In addition to the diversification points above, it is widely recognised that the direction of travel for UK DB schemes is towards a “low dependency” portfolio, that typically have a heavy reliance on credit since the characteristics align well with pension scheme liabilities. The market for inflation-linked corporate bonds is small and relatively concentrated, so many pension schemes have sought to enhance income and diversify risk through allocations to real assets such as long lease property or infrastructure. Build to rent offers something that sits between these two types of assets: the develop to hold model requires long-term investment and the underlying rents linked to CPI offer inflation-linkage. Ownership of the underlying buildings means the pension scheme’s money is secured in a real asset which can help diversify the default risk present in corporate bonds.
The Fund has a 9 to 12-year time horizon, including two years of construction ahead of income stabilisation. For pension schemes with a long-term investment horizon, we believe the Fund can provide an effective enhancement to low volatility inflation linked income streams within a CDI portfolio.
Both historically and presently, inflation linked income streams from the UK residential rental market have remained resilient during periods of volatility. There is a significant supply and demand imbalance in the UK, which we are boosting further by capping rental rates for our sites in line with CPI. In addition to this, the targeting of the UK rental market residents of low to middle income earners, provides us with a deep occupier base. It is after considering all of these points, that we believe the BMO UK Housing Fund can create a long-term low volatility income stream for schemes and be an effective enhancement to a scheme’s CDI portfolio.
1Knight Frank, Remit Consulting, June 2020
2Indicative only, BMO REP, Home Group, July 2020
3Savills, calculating housing need, September 2020
4CBRE Indicators of Recovery of the Residential Market, September 2020
5Zoopla House Price Index, September 2020