BUILD-TO-RENT (BTR) CONSTRUCTION MARKET OVERVIEW - UK & Ireland Q1 2020 - Arcadis
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BUILD-TO-RENT (BTR) CONSTRUCTION MARKET OVERVIEW UK & Ireland Q1 2020
BtR Construction Market Overview
BTR CONSTRUCTION DEMAND OVERVIEW
UK
In response to customer demand and good expected
For UK construction generally 2019 was very busy,
yields, 2019 saw the continued shift of BtR activity
reaching a historically high level of output for new
away from London to the regions with approximately
construction work. However, the overall construction
55% of homes completed in 2019 outside of London
new orders pipeline shrunk during 2019 as the housing
(BPF). In London, BtR projects currently account for
market stalled and as Brexit uncertainty took its toll.
about 20% of the new residential construction market
How quickly the resulting gap in workload can be filled
but Manchester has spearheaded the regional shift
depends on the pace at which clients can recommit to
and BtR construction currently accounts for roughly
investment in 2020.
half of new residential construction in the city region.
Although residential new orders in 2019 fell short
This pivot away from London is extending to
compared to the previous three years by around 8%,
Birmingham, Sheffield, Leeds, Liverpool, Edinburgh,
they were still broadly in line with the per annum
Cardiff and other regional cities offering improved
average since the recovery in 2012. New residential
investment returns, which are all attracting increasing
construction output reached over £42bn in 2019,
levels of investment interest in BtR and Co-Living.
the highest level ever and higher than recorded
output in the 2007 peak (ONS). 2020 has heralded
increased levels of customer interest and an upturn
in investment activity is being reported across the “There was a slowdown in capital markets activity
residential sector. in Q4 2019 because of general election uncertainty,
particularly the perceived risk of potential rent
In 2019 there was approximately £2.5bn of investment controls under a Labour government. Rent controls
in the BtR sector (CBRE), predominantly from in themselves are not necessarily a problem for
institutional investors, public and private companies. the market and tenant protection is very welcome,
Much of the investment to date has been domestically but uncertainty stemmed from the form potential
sourced but the share of investment from North controls might take.
America, Middle East and Asia is rapidly growing.
2020 has heralded a brisk return to investment
The BtR sub-sector outperformed the wider activity with investors eager to deploy equity in the
residential construction market in 2019, supported by ‘for rent’ sector. With such little suitable existing
strong rental growth expectations. UK completions stock, forward funding for BtR is becoming more
were up by around 50% compared to 2018, adding the norm, giving investors control of design as well
approximately 10,000 BtR homes in 2019 (BPF), as superior returns”
accounting for about 5% of UK-wide residential
completions. The NHBC reported an increase in BtR –Giles Scott
starts of 57% in 2019 compared to 2018. Director – Capital Markets and Transactions
MAINSTREAM RENTAL GROWTH
EXPECTATIONS “An increasing number of traditional open
market sale developers are opting to forward sell
developments as BtR sites to investors. Whilst this
UK Ireland model may offer lower overall margins it generates
As at
London Regional Dublin Regional
Q1 2020
Cities Cities a strong return on capital for developers and speed
to market with investors funding the build.”
2020 (f) 2.0% 2.0% 4.0% 5.0%
–Tom Mackenzie
5-year Not Not Senior Director – Lenders and Investors
19.8% 13.1%
compound (f) available available
(f) Forecast (Savills and SCSI)
2
BtR Construction Market Overview
REPUBLIC OF IRELAND “The ‘for rent’ sector continues to dominate
transactions in the Irish property investment
market. Tax and regulatory disincentives continue
Whilst Brexit-related uncertainty has impacted to drive buy-to-let landlords from the market
the Republic of Ireland to an extent, the Irish
and there remains a shortage of ‘for rent’ homes
construction market has seen strong performance
compared to demand. We expect 2020 to see
since recovery commenced in 2013, growing by over
80%, albeit from a relatively very low base (CSO). This continued high levels of demand in the sub-sector.”
has predominantly been driven by good economic
performance and the emerging tech scene spurring –Sabrina Mackin
private investment as well as a clear pipeline of Client Development Director – Republic of Ireland
public sector projects. Overall construction output is
expected to grow by 15% to 2022.
The residential sector has outperformed wider “With market sale viability being tested, we have
construction activity, seeing a 300% increase in new seen an increasing number of our clients wanting to
residential construction output since the start of explore the BtR commercial model. Working with
2014, to reach almost €5bn in 2019 (CSO). Further local authorities to maximise agility within planning
growth is expected, and the housing challenge is permissions can provide some flexibility at the early
prominent in government policy around shortages of stages.”
supply, affordability and homelessness.
–Tim Robinson
The BtR sub-sector is hot in Ireland, particularly Partner - Commercial Development
Dublin. An estimated €2bn of investment has flowed
into the sector in 2019, much of it from wider Europe
and increasingly from North America. Approximately
3,000 BtR homes were completed in Ireland in
“Consistently we hear in the market that viability is
2019. Proportionally, this makes the BtR sub-
a big hurdle when it comes to BtR investment. Our
sector more prominent in Ireland than the UK and
experience tells us that viability can be achieved
places increased pressure on supply chains to meet
demand. Whilst Dublin has been a main focal point of through adjusting the balance of key levers, to arrive
investment, Cork, Galway and Limerick are all seeing at an attractive investment proposition.”
increasing levels of investment interest in the sector.
–Chris Jones
Director – Development Advisory
3BtR Construction Market Overview
BTR CONSTRUCTION PIPELINE
Number of BtR homes in planning or construction (000)*
UK London 55
UK Regional Cities 55
Ireland 18
TOTAL 128
(BPF, daft.ie, LIV Consult)
*Figures are approximate, subject to change and indicative only
RESIDENTIAL DEVELOPMENT LAND
Despite Q4 2019 seeing a great deal of uncertainty, UK residential development land values increased
marginally, rising 1 to 1.5% in the year. Constrained availability of suitable sites continues to be cited as a
main barrier to development.
For the BtR sub-sector, competition with Build-for-Sale projects in acquiring land continues to be a
key challenge. The higher annual rates of return typically achieved with Build-for-Sale can enable it to
displace Build-for-Rent projects in the land acquisition stage.
To compete, innovative approaches are needed in the BtR sub-sector to drive return on equity for
developers. As such, smart design, mixed tenure schemes and relatively higher density can help. Joint
ventures between the private and public sectors involving provision of land in exchange for a de-risked
interest in a long-term income generating asset and delivery of broader social objectives have also been
proven in the market.
4BtR Construction Market Overview
BTR CONSTRUCTION TENDER PRICE FORECAST
Our view is that construction tender price inflation for residential projects currently broadly aligns with the wider
market. However, our view tracks factors that are likely to result in a divergence in inflation expectations from
other sectors, for example demand and supply balance for key packages that proportionally have more influence
on residential construction such as drylining and others in fit out.
The below table outlines our anticipated construction tender price growth in the BtR sub-sector in the year to Q4.
It is important to note that the below represents the expected average across a range of schemes. It is important to
take project-specific factors into account when forming a view on tender price inflation at project level.
(e) Estimate UK Ireland
London Dublin
(f) Forecast Regional Cities Regional Cities
2019 (e) 1.0% 2.0% 6.0% 6.0%
2020 (f) 1.0% 2.0% 5.0% 5.0%
2021 (f) 3.0% 3.0% 4.0% 4.0%
2022 (f) 5.0% 5.0% 4.0% 4.0%
2023 (f) 5.0% 5.0% 4.0% 4.0%
(Arcadis)
BTR INDICATIVE CONSTRUCTION COSTS
Indicative only based on gross construction cost for BtR apartments, for a variety of scales, designs, specifications,
procurement routes and locations. Project-specific factors are obviously key to forming a view on likely
constructions costs. Clients considering investing in BtR developments should engage consultants experienced in
the sub-sector.
Indicative figures are given on a per m² NIA basis in local currency.
UK Ireland
Per m² as at Q1 2020 London Dublin
Regional Cities Regional Cities
Range £2700 - 5000 £1700 - 4000 €2200 - 2700 €2200 - 2700
Average £3850 £2850 €2450 €2450
(Arcadis)
THE FUTURE HOMES STANDARD
The UK Future Homes Standard consultation was launched in 2019 covering proposed changes to Part L
(Conservation of fuel and power) and Part F (Ventilation) of the building regulations for new homes.
The standard is aimed at dramatically reducing carbon emissions associated with the construction
and operation of new homes. Interim changes designed to deliver a 20 to 33% reduction in emissions,
depending on the preferred option, will be introduced in 2020 with fuller implementation of a more far-
reaching standard by 2025.
End customers are increasingly environmentally conscious and enhanced environmental performance is
and will increasingly be a driver of customer choice, a key focus in the BtR sub-sector. Additionally, some
of the standards being proposed may drive whole life savings for BtR operators in due course.
However, achieving the build quality implied by the new standards may be a challenge. There may also
be supplier capacity constraints associated with key material specification upgrades, for example triple
glazing. The likely introduction of measures to disincentivise electric heating and all-electric buildings
could also present challenges for BtR clients that will need to be considered at the earliest stages of
project lifecycle.
5BtR Construction Market Overview
CONSTRUCTION SUPPLY-SIDE OVERVIEW
Many organisations will not differentiate their In a random sampling of 24 development partners
experience in BtR projects from experience in other and main contractors operating in the BtR sub-sector,
residential asset classes. The involvement of delivery we found the average margin was 3.8% last year, an
partners and main contractors that truly understand over 40% improvement on the average margin the
the BtR product can be beneficial because previous year. Whilst average margins have shown
succeeding in the BtR market can demand different improvement, insolvencies in the industry are still
approaches compared to the more dominant ‘for at concerning levels. According to the Insolvency
sale’ sector. A heightened focus on end-customer Service, there were 6814 business failures in UK
experience and whole life operation are examples of construction in 2019, a 6.4% rise on 2018.
critical aspects that may contribute to performance
of BtR investments. Working with organisations that The money owed to unsecured creditors such as
understand the full range of potential key success subcontractors, unlikely to be recovered, runs into
factors in BtR, can help make projects more viable the hundreds of millions, only adding to financial
and successful. fragility across the industry. The precarious state of
contractors’ finances can stoke risk aversion and can
restrict the supply chain’s ability to reduce or hold
UK pricing. However, this is not a dominant consideration
in our tender price forecast. The main price drivers
As a result of Brexit-related uncertainty, and that we have allowed for in our tender price forecast
particularly the impact felt from this in the are increasing labour and material costs and
commercial sectors, some capacity returned to parts perhaps some recovery in margin which is related to
of the main contracting market in 2019, in London increasing bidding activity.
for example. As a result, now may be a good time for
clients to procure projects to secure capacity. Brexit-related risks associated with the trade deal
negotiations, the impacts of which will not be clear
That said, the market is still relatively busy and until 2021, could lead to the supply chain’s attitude to
decisions made by some contractors back in 2018 risk hardening in 2020, which can manifest as higher
to reduce turnover targets for 2019 and 2020 rather pricing. That said, in 2019 we saw many contractors
than risk engaging in aggressive price competition happily bidding without any protection against
have played out with operations rationalised where key Brexit risks, suggesting the balance for many
necessary. constructors is more in favour of risk-seeking.
Financial fragility in the supply chain remains a key
issue. This year’s ranking by Construction News
saw the top 10 main contractors record an average
margin of 1.4% and the top 100 an average margin of
2.1%.
6BtR Construction Market Overview
REPUBLIC OF IRELAND “In Ireland, two of the biggest challenges we are
seeing in the BtR sub-sector is access to and the
cost of suitable sites and growth in construction
Capacity constraints are worse in Ireland than costs. Rapid optioneering of schemes, for example
in the UK, highlighted by the very high levels of
using our parametric design tool, is increasingly in
construction tender price inflation and widely
demand and construction clients are increasingly
reported issues securing suppliers for projects. The
speaking with us about the potential speed-to-
level of activity signifies that much of the supply
market and other benefits that modern methods
chain is ‘running hot’ meaning good management
and assurance of projects is key as ever to ensuring of construction, such as modular, could deliver for
quality delivery to time and cost. their schemes.”
Despite the high levels of construction tender price –Joe Bermingham,
inflation, contractor margins are generally still Director – Republic of Ireland
relatively low single digits, due to the substantial
rate of input cost inflation. Significant increases in
labour costs are a key contributing factor to this and
securing the right skills a continuous challenge. “The BtR Market has started to mature as the
product become a significant part of our annual
Whilst still a concern, financial poor health of the construction output. Developments are now being
Irish supply chain appears to be less pronounced than designed for BtR rather than designed as a market
in the UK. Insolvencies in the construction sector in sale product to protect the exit strategy which
2019 were lower than in 2018, suggesting improved opens the opportunity for more standardisation.
financial performance in the sector.
We are seeing increased interest from developers
to explore modular construction and the benefits
to deliver high quality developments at speed at
competitive costs.”
“Integrating design and construction with future
operational management is crucial to success in
–Matt Howell-Jones
BtR. Working with construction consultants and Partner – Residential
supply chain that fully understand this should
be a key aim for construction clients in the BtR
sub-sector and reliable assessment of this is an
important part of the tender process.”
–Richard Jones
Partner – Residential
“Providing an exceptional experience for end-
customers is central to the success of BtR schemes.
Placing this at the heart of the construction delivery
model, for example by ensuring the objectives and
measurement of all suppliers align with and drive
towards the end-customer experience, is a key lever
for ultimately maximising success and investment
returns.”
–Will Waller
Director – Build-to-Rent Market Leader for Arcadis
7Sources:
• Arcadis
• British Property Federation (BPF)
• CBRE
• Central Statistics Office (CSO)
• Construction News
• Daft.ie/LIV Consult
• Ministry of Housing, Communities & Local Government (MHCLG)
• NHBC
• Office for National Statistics (ONS)
• Savills
• Society of Chartered Surveyors Ireland (SCSI)
• The Insolvency Service
Contacts
Will Waller Andy Matthews
Director - Build-to-Rent Market Leader Partner - Commercial Development
Sector Leader
E. will.waller@arcadis.com
E. Andy.matthews@arcadis.com
James Knight Ross Gissane
Partner – Residential Sector Leader Partner - Lenders and Investors
Sector Leader
E. James.knight@arcadis.com
E. Ross.gissane@arcadis.com
Arcadis
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Disclaimer
This market overview report is based on market perceptions and research carried out by Arcadis, as a design and consultancy firm for natural and built assets. It is intended for
educational purposes only and should not be construed or otherwise relied upon as investment, financial or delivery advice. This document may contain forward-looking statements.
Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. Actual results could and likely will differ,
sometimes materially, from those projected or anticipated. Arcadis is not undertaking any obligation to update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. You should not take any statements regarding past trends as a representation that those trends or activities will continue in the future.
Accordingly, you should not put undue reliance on these statements. The data in this document is not guaranteed as to its accuracy and does not purport to be complete. Arcadis
accepts no liability for loss arising from the use of the material presented in this report. This document should not be relied on in substitution for the exercise of independent
judgment.
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