This post will discuss 5 threats to investment that you should always keep in mind.
Generally, no enterprise has a zero-risk guarantee. Especially when dealing with investments, there are only low-risk investment plans. Therefore, it is ethical to ensure that investors are well aware of the potential risks of the investment. Regardless of how inconsequential it might seem.
Build to Rent development, like every investment is not exempt from risk. Although, we can say it a low-risk investment due to its a-cyclical nature. This means that Build to Rent developments move independently of the overall state of the economy. It is to a great extent guileless by the fickle changes in the housing market. However, it is not without risk that can threaten the overall success of any Build to Rent development. That’s why it is necessary to ensure, investors and developers are familiar with the risks of participating in a project.
The Nature of Build to Rent:
Understanding the nature of Build to Rent development is the first step to unraveling what threatens a BTR project. The distinction between Build to Rent and other forms of housing is that BTR investors retain ownership of all the units in the development. Rather than distributing them amongst themselves or selling parts of the development.
Investors gain from the steady returns on their investment from the rentals rather than immediate dividends made from sales. Due to its steady growth, it hardly has the influence of the short time changes that affect the traditional housing market.
This makes a Build to Rent development model for investors with a long-term investment plan very attractive. It is still fundamental to examine investment risks that may arise long-term. The same is in the short-term in the course of a Build to Rent development project.
5 Biggest Threats to Investment in Build to Rent Sector
Threat to Investment 1: Setting the Rental Values Wrong
Let’s start with the first of the threats to investment. When the rental value for the development is overestimated the letting rates for the renters would be unreasonably high for the market. When the Build to Rent units are too expensive people won’t take up the units, regardless of the location. This would stunt the economic success of the development, leading to poor return on investments for investors. This is why, when one is trying to determine how much rent to charge, there are important factors to consider. Accurate calculations of the rental value of the development is a key component to containing this potential threat.
Threat to Investment 2: Supply Saturation of Build to Rent Developments:
Having many Build to Rent developments in an area is one of the biggest dangers to the economic success of any development. With lots of units available in a small area, the value of each unit falls, beyond the estimated scope; which means estimated returns on investment will be affected. It is important to consider the long-term growth of the area, and the possibilities of other Build to Rent developments being built there.
A prime example of this would be Wembley in London having an oversupply which dwindles the demand. Lewisham is also on target to have over 3000 Build to Rent units in close proximity over the coming years, so it could suffer the same fate. So, it is in the best interest of the success of the development to identify locations with long term rental demands and depth of market.
Threat to Investment 3: Lack of Research on Target Market/Demographic:
The success of a Build to Rent development faces the threat of a lack of consideration for the housing needs of the target demographic. Lack of this information can lead to providing incorrect apartment layout or size or rooms. For example, if the development is located around a younger student demographic, it would be of more benefit to provide low-cost students sized apartments with the necessary layout. Also, lack of research would lead to the provision of unnecessary or redundant amenity space. For instance, you wouldn’t add a gym to the building if there was a large gym next door.
Threat to Investment 4: Government Regulations:
It is the greatest potential threat to the Build to Rent sector. Being unaware of the political posturing and governmental regulations towards the housing sector could be, the very first step to the failure of a project. Especially as housing is consistently on the radar of the United Kingdom’s political agenda. With the Labor Party advocating for three-year tenancies as the standard for rents, while the Conservatives have called for a search for ways to promote longer tenancies. All of which may increase the chances of the introduction of new regulations that may affect the housing sector.
Another tussle between both parties is on the issue of rent regulation, as to whether the rental market should be regulated with reasonable restrictions on rent inflation. It would, of course have a great effect on the underwriting and a Build to Rent developments ability to remain competitive in the land market.
Threat to Investment 5: Land Values in Bull Market:
The location of a Build to Rent development is a key factor in determining how well the development will perform economically and financially. This is why Build to Rent developers compete for the best land in the area amongst themselves as well as with open market sales developers. With an increase in the demand for the best land in the area, the values of the land rise higher than budgeted. We observe that land value can increase up to about 15% to sometimes 25% of the Build to Rent feasible land value offer. It happens when competing with open market sales developers at the bid stage. It poses threats to investment in the chance of a Build to Rent to secure the best land for development.
Final Words About Threats to Investment:
Although Build to Rent is a safe economic investment when done correctly, there are still threats that must be mitigated that could reduce the success of development over time. It is also important to familiarise the investors with these possible areas with the measures in place; to ensure transparency in the project dealings and provide detailed mitigation strategies for risk areas.
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