This year, we have discussed a lot about the build-to-rent (BTR) boom. Nowadays, more people are renting than buying, and investors have focused on this new formula. The large funds have focused on the search for assets for rental housing in blocks. However, a new trend that will not take long to arrive in Spain has already begun to move to other countries such as the United States and the United Kingdom: investing in BTR in scattered single-family homes.
“Institutional investors are constantly looking for investment opportunities that generate cash flows and inflation protection. For this reason, interest in rental residential has increased exponentially in the last decade, especially in dispersed where diversification is greater. Saving distances and investing in dispersed would be like investing in the Ibex 35 Index, and investing in a block would be like investing in a single stock. This global trend is recently accelerating in Spain due to the impact on the BTR due to construction cost increases, high competition, and location limitations. In recent years, we have seen how pension funds entered into dispersed rentals. It will soon happen in Spain,” explains Juan Manuel Bello, CEO of PropTech Vidoqui, a technology platform that facilitates access to housing without debt through rental housing with an option to buy.
In the end, a group of investors in Spain, including large international investment funds and entrepreneurs, have opted for build-to-rent and have several projects in hand. According to Colliers International, there were 8,000 new homes for rent at the end of 2020, between started and finished projects, representing an investment of 2,000 million euros. However, why is there still no commitment to build-to-rent in single-family homes? According to Mikel Echevarren, CEO of Colliers, “within the concept of BTR, as new construction projects, scattered housing is not included. There have been some transactions of rental housing buildings without 100% ownership, but these are residual operations. The difficulties in managing the maintenance and rehabilitation of buildings with multiple owners, resulting from the majorities determined in Spain by the Horizontal Property Law (Ley de Propiedad Horizontal), prevent almost all of the funds from investing in buildings of this nature”.
Single-family homes, the current trend
After Covid-19, the current trend in the market centers on the search for single-family homes with gardens and outdoor spaces, and the rent-to-own option is beginning to be in demand. This formula has been consolidated outside Spain, for example, in the latest operation of Blackstone. The company has bought the rent-to-own company, Home Partners of America, with 17,000 single-family homes scattered all over the United States.
The driving force behind the deal is clear. U.S. home sales soared last year on low mortgage rates, and the increase in remote work during the pandemic caused buyers to seek homes with larger, open-air living spaces. The lack of supply and active demand has led to the build-to-rent formula for scattered-site housing.
This trend is not only visible in the United States but also in the United Kingdom, where Legal & General’s alternative asset platform has added a suburban build-to-rent (SBTR) business to its direct investment program. The company’s goal is to partner with UK homebuilders to develop large-scale single-family rental communities in suburban locations throughout the UK.
These are two examples of the current trend outside Spain to build to rent in dispersed. So, why isn’t it done in Spain? The dispersed rental has traditionally been reviled for many reasons: the difficulty of managing large portfolios, the higher management and maintenance costs, the apparent lower profitability, the increased potential risks of non-payment, the greater difficulty in accessing bank financing, or the complexity of executing the asset rotation policy.
However, Oscar Valles Cavia, Fellow Funders’ partner & CRO, an alternative investment firm with extensive experience in dispersed leasing operations, states in the company’s blog that perhaps the problems are not so extreme. “In terms of lower profitability, either directly or through increased potential default risks, a careful analysis of the problem perhaps tells us that the reality is certainly the opposite. Regardless of the dispersion, the profitability of a portfolio lies in the relationship between the income obtained and the investment made, not in the concentration of ownership. Besides, there is a fact that often goes unnoticed and is of great importance in the investment world. When diversifying our investment portfolio, the risks are also diversified, and the overall risks of the portfolio are reduced. Let us imagine that we have a residential building in operation. We have a problem with a tenant or an operational problem (elevator breakdown, electrical problem, etc). Whether we like it or not, this isolated incident ends up having repercussions for the rest of the tenants. In a dispersed portfolio, each property is an independent business unit and has no relationship with the rest of the properties that make up the portfolio”.
Another issue that can be considered a difficulty is when accessing bank financing if what is to be financed is a dispersed portfolio versus a portfolio composed of a small number of properties. Mr. Valles points out that “from the lender’s point of view, it would be preferable to have a credit operation with a diversified risk rather than a risk concentrated in a single asset. However, the apparent paradox in many cases is that compared to this lower degree of risk, financial institutions value the higher operating costs involved in formalizing a transaction with a high number of guarantees. Fortunately, this is changing, and banks are beginning to value the risk more than the operating and formalization problems that the transaction entails”.
Regarding the rotation policy in a dispersed real estate portfolio versus a concentrated portfolio, it is simpler to liquidate a single asset than a group of properties. However, the higher the concentration, the more difficult it is to find the right moment to maximize profit and the greater the buyer’s bargaining power. If we have an adequately diversified portfolio, it will be easier to have an asset available for sale at any time. But, if we are looking for speed in liquidating the entire portfolio, the process could take longer in a dispersed portfolio. It will depend on the sale prices we set rather than the volume of assets to be sold. To conclude, Valles explains, “it is evident that managing an investment portfolio in dispersed real estate assets entails considerable operational complexity. However, it has in its favor the greater diversification in risk.”
Source: El Economista – Real Estate (print edition).
