BTR’s difficulties with entering the European market

Build-to-rent (BTR) residential, the sub-sector consisting of private residential designed to be rented, is a mature market in the US. While it’s very strong and considered a classic in their real estate sphere, this is new to most of Europe, except perhaps the UK and Germany which are definitely leading the charge. BTR can bring many benefits such as much needed institutionalisation and affordable living in cities too expensive to own a home in, so why is it so slow to start across continential Europe?

This was the subject of a session at Europe GRI 2019, where over 450 of the world’s most senior names in real estate gather for candid, closed door discussions where all are encouraged to speak freely. One of the points debated during the session was whether or not BTR was a “sure thing” or just something situational for the US.

The players active in Germany noted how the way in which they approach BTR has proven to be very successful. The leading country in the sub-sector across continential Europe, Germany rely heavily on data to understand their tenants and develop units specifically to customers’ expectations. If tenants express the need for larger units, they will be developed. This differs slightly from the US model, which tends to focus more on intuition and basing lean methods on iteration. 

Success in the UK came primarily from a housing shortage, especially a shortage of affordable living near cities where they work. Perhaps unique to the UK, interest rates are at an all time low, making debt cheap. Private equity is also investing into the sector, finding that risk/returns are great for rented accommodation with good proximity to London. 

However, in France and Central Eastern Europe, BTR has seen little penetration into the market. France proves to be a difficult entry for BTR developers as various pieces of legislation, taxation, and already high proportions of household income allocated to rent that there isn’t much room for price growth. The first projects in CEE are underway and student/senior living is very much on the rise but the market is immature and lacks data, thus it is considered to have a long way to go to match Germany and UK. In Warsaw, for example, there is a huge undersupply in student housing and there is much success for a developer/investor who wants to take on the relatively high risk.

Perhaps the US model is something Europe would benefit from adopting. According to one developer, differences and similarities in scheme is not the issue. It’s the management that matters. Operators have found through experimenting that great managing, whether it be through communication or general maintenance, creates the most value. 

Some suggested BTR right now is only really viable as a core part of residential asset in a portfolio in the UK and Germany, where both the tenants, local developers and lenders generally understand the model and have a good relationship. Cities experiencing high rents in city centres and locations within commutable proximity to workspaces are the most likely places to benefit from implementing BTR. Participants also argued that coliving is becoming very promising and will most likely be extremely integral to the real estate market in the next 20 years. 

 

Opportunities to discuss strategy with the most important players in BTR and coliving will be available at GRI Residential Europe on 26-27 November in London. 

Article by Matt Harris