There has been much chatter about a potential breakthrough in the build to rent (BTR) sector in Scotland but one recent deal appears to confirm we have turned the corner as far as gaining buy-in from institutional investors is concerned and signals that the BTR market will begin to meet expectations.
Across the UK, investment in BTR hit £2.7 billion in 2017, up 23 per cent on the previous year, with just under £2bn of that as forward funding or forward purchase deals. While BTR developments have been completed or are in the pipeline in Aberdeen (920), Dundee (228) and Edinburgh (1,200), Glasgow undoubtedly leads the way with planning consent in place for more than 3,100 BTR homes in the city.
However, Legal & General’s decision in January to invest in a 324-apartment development at Buchanan Wharf in Glasgow – its first BTR investment in Scotland –could signal a future direction of travel for institutional investors.
Having advised on the Legal & General transaction, I am aware that the fundamental financial elements of a BTR development in Glasgow or Edinburgh are not dissimilar to those in cities such as Birmingham, Manchester, Liverpool or Leeds, and it is fantastic to finally have institutional investors like Legal & General and Aberdeen Standard commit to significant investment in BTR in Scotland.
The demographic profile of our two biggest cities, relatively low unemployment, and a new generation of young professionals who are less focused on owning property but who equally value being able to live in modern and vibrant neighbourhoods all appeal to investors. The fact that Glasgow was ranked the top Scottish city and number five in the UK for the retention rate of graduates (46 per cent) who chose to remain in the city after leaving university, no doubt provides further encouragement. The retention rate for Edinburgh was not far behind at 42 per cent.
The expected stability of rental growth and safer long-term income streams to come from BTR projects such as Buchanan Wharf should give us all confidence that Scotland is ready to play its part in this market. We should also remember that Scottish BTR projects have a major financial advantage over similar schemes in England via the exemption from Additional Dwelling Supplement tax in Scotland. That exemption is worth far in excess of £1 million on a £50m development and gives developers and investors extra room in their budgets to assist local authorities in achieving targets to meet affordable housing aspirations. That exemption should rightly be seen as a major component in the viability of BTR projects and another draw for inward investment to Scotland.
The private rented market is still very fragmented with a large number of smaller independent landlords, and subsequently a lack of consistency in the quality of available properties. However, this new and welcome market dynamic should lead to more professionally managed BTR developments, hopefully driving institutional investment and ultimately a vast improvement in the quality of private rented properties available in Scotland, potentially leading to longer tenancies.
Legal & General’s BTR platform aims to have 6,000 homes across the UK in planning, development or operation by the end of this year and further investment in Scotland is expected. We know other institutions are actively targeting similar investment north of the Border and so the question mark hanging over the viability of BTR looks to have been finally answered. It appears Scotland is about to benefit from a belated share of this market.
I am optimistic that we are in the early stages of a new wave of investment in Scotland’s BTR product and hope that planning officials and politicians will give a warm welcome to those institutions and funds which are facilitating these schemes, creating jobs, and developing new modern communities in Scotland.
- Martin Devine, partner and property investment specialist at Pinsent Masons