Be wary of Berkeley’s shift from housebuilder to landlord
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
New home sales in Britain are stalling thanks to a combination of low affordability and higher financing costs. Instead, the rental sector is taking the housing strain, with rents soaring.
The outlook is for more of the same. Hence Berkeley Group, the upmarket housebuilder, has decided to get in on the action with plans to create its own build-to-rent business. The company, focused on London and the South-East, said it had identified 4,000 homes for the project on Wednesday. Shareholders should be wary.
The rationale for rental looks sound enough. Sales at Berkeley were down a third last year. Build-to-rent should bring forward some production from a land bank that has ample room to meet the needs of private demand as well.
The company has already made about 1,000 BTR sales in recent years. It argues that a “platform approach” — or managing those rentals properties itself — will narrow the discount that institutions demand when they invest. That value will instead go to Berkeley shareholders, albeit not until towards the end of the project’s 10-year lifespan when a sale is mooted as a possible exit.
The UK build to rent market looks set for lift-off. Demand for rental property vastly outstrips supply, especially in Berkeley’s core region. London already counts a bigger share of rental property in its total housing stock at about 30 per cent. And rents have been rising faster, up 14 per cent since the start of last year compared to 12 per cent for the UK as a whole, according to ONS data.
But Berkeley’s decision to pile in now should raise questions for investors. The first, despite its predictions of recovery, is what this strategy switch says about the outlook for the core business. Berkeley’s expensive London dwellings sell to private foreign investors. A potential new Labour government could hit this source of demand with a higher top rate of stamp duty for foreign property investment.
There is also the question of delivery. Berkeley is known as being an excellent housebuilder but building a rental platform is a different business altogether. Housing sales are one-off affairs but tenants have the option to walk if they are not kept happy.
The company says it could bring in a third party to manage the early stages of the project. That would eat into its returns. Moreover, an in-house management platform would likely be needed to sell the business in a decade’s time, further limiting Berkeley’s options in this strategic shift.
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