All investments carry a level of risk, so, it is essential that investors are aware of any potential risks. Build to Rent, like every investment, is not exempt. In this article we explore some of the common investment threats associated with BTR.
The Nature of Build to Rent:
Understanding the nature of a Build to Rent development is imperative to understand what can threaten a project. The distinction between BTR and other forms of housing is that BTR investors retain ownership of all units.
Investors gain from the rentals rather than immediate dividends from sales. Due to its steady nature, it is hardly burdened by regular threats to the traditional housing market.
This makes the Build to Rent model an attractive long-term investment. However, it is still vital to properly analyse investment threats.
5 Biggest Investment Threats
Investment Threat 1: Setting the Rental Values Wrong
When the rental value is overestimated, the cost of rent is too high for the market. If units are too expensive, people won’t want to pay for them, regardless of the location. This can stunt the economic success of the development & lead to poor ROI. Accurate calculations of the rental value of the development is a key component to containing this investment threat.
Investment Threat 2: Supply Saturation
Too many BTR’s in one area is a threat 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 ROI will be affected. It is important to consider the long-term growth of the area, and the possibilities of other BTR developments there.
A prime example of this is Wembley in London having an oversupply which dwindles the demand. Lewisham is also on target to have over 3000 BTR units in close proximity. So, it is in the interest of the development to identify locations with long term rental demands.
Investment Threat 3: Lack of Research
The success of a BTR relies on the demand from the target demographic. Lack of research could lead to providing incorrect branding. For example, having a formal, suited concierge in a laidback, casual area. It can also negatively impact amenity space. For instance, you wouldn’t add a gym to the building if there was a large gym next door.
Investment Threat 4: Government Regulations
Being unaware of the political posturing and governmental regulations could be the first step to failure of a project. Especially as housing is consistently on the radar of the UK’s political agenda. There is always a chance that the introduction of new regulations may affect the housing sector.
Investment Threat 5: Land Values in Bull Market
The location of a BTR is a key factor in determining how well the development will perform economically and financially. Developers compete for the best land in the area amongst themselves, as well as with open market sales developers. With an increase in demand for the best land, the values rise higher than budgeted. We observe that open market sales developments can outbid BTR developers by apx 15% (sometimes 25%). As competition increases, so will the land value.
Conclusion:
Although BTR is a good investment, there are still risks that must be mitigated. Research prevails as the key factor. Understanding the demand & demographic in the area as well as pricing accurately can all help lower risks. Further, keeping consistently up to date with government regs and competitors plans will significantly lower investment threats.
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