Investing in Belfast’s Future: A Real Estate Research Report

Build to rent - huge growth opportunity

The UK’s multifamily residential sector has undergone significant growth, as affordability constraints of home ownership and a variety of lifestyle shifts have resulted in more people renting for longer. High tenant demand, coupled with the historically-attractive risk-return profile of UK residential property, is driving a new wave of institutional investment into the sector. Belfast has continued to experience high levels of development in the purpose-built student accommodation (PBSA) sector. Other regional cities ahead of Belfast in the development cycle have then witnessed post-graduate students relocating from PBSA into co-living and build to rent (BTR) markets.
 

CBRE Research

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Multifamily housing market snapshot

The rise of multifamily housing

The expansion of multifamily housing (MFH) as an asset class across Europe has been underpinned by growth in the wider private rental sector (PRS). There is 31 per cent of European households living in private rental homes, up from 26 per cent over the last decade. This reflects a range of social and demographic trends. For example, population has been increasing, particularly in the younger, typically renter cohorts.

A compelling investment

Added to the favourable demand profile, MFH provides a compelling investment case. Its income profile, with low volatility and low risk, appeals to a wide range of investors. Often inflation linked, the income stream correlates particularly well with pension fund liabilities. It also gives an opportunity for investors to diversify into an asset class, which has a low correlation with other asset classes and the wider economic cycle. Comparing total returns across assets at a European level shows residential has performed consistently well. A growing, resilient and evolving sector MFH is a relatively new asset class in Europe, but CBRE is expecting the level and share of MFH investment to increase in all European markets as momentum gathers. According to CBRE’s recent EMEA Investor Intention Survey, a quarter of respondents noted a preference for MFH investment, making it the second most popular property type after offices. Our forecasts suggest that by 2025 residential investment, of which MFH is around 75 per cent, will total nearly 80 billion Euro, up 20 per cent over five years.

Resilient in the face of the pandemic

The level of MFH investment has increased significantly over the last decade, and particularly since 2015. Moreover, despite the COVID-19 pandemic, MFH investment rose in 2020, totalling 47 billion Euro, 227 per cent higher than in 2019. In contrast, total commercial real estate investment fell by 17 per cent. As a result, MFH accounted for around 17per cent of total commercial real estate investment. When including other residential sectors, such as the student sector, investment totalled 66 billion Euro in 2020, up 7 per cent on 2019.

And it’s evolving

As well as growing in size, the market is evolving in nature. For example, over the past few years we have seen an increase in cross-border activity. In 2020, around 17 per cent of investment originated from North America, up from 7 per cent in 2017. Domestic investment still makes up the lion’s share, but has fallen from 62 per cent to 48 per cent with the rise in cross border activity.

Investment

Despite COVID-19, MFH investment in 2020 totalled a record high of £3.5billion; 30 per cent up on 2019 and 15 per cent higher than the previous peak in 2018. It now accounts for 8 per cent of total UK investment, up from 5 per cent in 2019. Even throughout a challenging year, 2020 saw several new entrants. For example, Countryside agreed a deal with Goldman Sachs, which could deliver up to 1,000 new rental homes over the next three years. And John Lewis announced plans to move into the sector, with proposals to convert excess space in its retail store portfolio. Existing investors are also expanding and diversifying portfolios.

Outlook

Pricing generally remained in line with pre-COVID-19 expectations, and the benchmark yields remain largely stable and unchanged in Quarter 4 in 2020. However, we are seeing indications of prime locations trending stronger. Sentiment remains broadly positive moving forward, and a sizeable pipeline will start to feed through to the market. We forecast MFH investment to total £4.1billion by the end of 2021 and surpass £7billion by 2025.

We also expect to see a drive of institutional grade capital into single family housing. (Source CBRE Research – European Multifamily Housing Report April 2021)

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The build to rent (BTR) opportunity

• Projected population growth over the last five years is equivalent to an additional 2,800 people per year living in the city of Belfast. Over the next 20 years, Belfast City Council is targeting population growth of 3,300 people per year.
• Belfast has a higher proportion of young adults in the population, compared with Northern Ireland as a whole, in particular in the 20 to 34 years age bracket. This suggests that a high proportion of young professionals are being attracted to the area. In contrast, the proportion of children and over 40s is lower.
• According to Experian, the sociodemographic profile of the city is diverse. The inner city population is a mix of young people, students and elderly citizens, with most families living in the suburbs. Four groups dominate, two of which are key renter groups.
• ‘Transient Renters’ and ‘Rental Hubs’ account for 85,540 people in the city of Belfast - one quarter of the total population. ‘Transient Renters’ are typically younger and less affluent, often students and young people searching for employment, renting low-cost properties while they establish themselves. The ‘Rental Hubs’ group is more affluent, a mixture of age groups in professional occupations.
• The latter group is the core target market for a new, high quality, build to rent product. However, over time, it is likely that those individuals currently defined as ‘Transient Renters’ will gain employment and establish themselves in the area, in turn leading them to look for more expensive and desirable rental properties.

Which towns and cities will see the strongest demand in the future?

• CBRE has identified 20 towns and cities across the UK, including Belfast, that will potentially see the highest demand for private rented accommodation over the next 10 years and where there will also be more demand for multifamily developments.
• CBRE built a statistical model to analyse the demand drivers of the private rented sector (PRS) across all local authorities in the UK. The analysis identifies three main factors influencing greater demand for rental accommodation. These are: locations with higher percentage of population aged 25 to 34; high numbers of students; and the relative size of the economy. These three factors have a quantifiable impact on the size of the PRS in a given town or city.
• The findings were then applied to forecasts for each metric to quantify the potential change over the next decade. To further support the findings, CBRE combined the results with three additional metrics, based on CBRE’s Creative Cities Index, projected employment growth, and the current multifamily development pipeline.

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Multifamily residential market

Students

Historically, the rising number has resulted in traditional halls of residence being unable to accommodate the demand. Many students are forced to rent in the private rental sector or houses of multiple occupation (HMOs).

• Following the introduction of student fees in 2012, there were higher expectations for the entire university experience. Student accommodation became a crucial element and now ranks alongside the course, the location and the reputation that each institution offers.
• PBSAs have provided memorable residential experiences for students and offer experiences, health and wellness support, exceptional amenities, social connections, safety and more.
• In Belfast, the market reacted to this lack of supply for good quality PBSA accommodation and over 6,000 bed spaces have been created with further schemes in the development pipeline.
• Build to rent development allows post-graduate professionals the opportunity to continue to connect with people, share common spaces, keep costs down and enjoy the time as young professionals.
• Build to rent is also well suited to young professionals, but often might be couples (could be downsizers) or friends who want more privacy and more personal space but still benefit from a residential community and access to amenities.
• It is clear that there is potential for the multifamily sector to grow within Belfast. This will be driven both by existing investors expanding portfolios and new entrants diversifying from traditional commercial real estate.
• Belfast’s impressive student-to-worker retention ratio will also drive up the demand for new types of housing, much of which will be in the city centre thanks to Belfast City Council’s drive to promote city centre living, with a goal of attracting 66,000 people and 31,600 additional homes by 2035.

Across the UK and Ireland, investment into the residential sector has been strong. Alongside logistics, it is arguably the biggest UK investment trend at the moment. Such is the shift to this type of living and this type of investment, that there is now more equity targeting UK multifamily property [approximately £40billion] than Central London office property.

• Build to rent (BTR) is a new and distinct subsector within the private rental sector. It refers to large blocks of rental homes that are being built as a result of institutional investment. The sector is attracting significant investment and is fast becoming an established segment of the UK and NI housing market.
• UK rental yields are attractive. CBRE estimates these range (on a net basis) from 3.15 per cent at the very prime end to 6 per cent at the more secondary end. A key differentiator among BTR operators (and between BTR and smaller PRS landlords) is management of operational performance. In general, operating costs will account for 24 per cent to 28 per cent of gross income, with larger schemes typically benefitting from greater operational efficiency and economies of scale.
• This market is already worth 103 billion dollars in the United States and in the UK over £6billion was invested into the sector in 2020, up 25 per cent year-on-year. It offers strong international appeal, as investors are attracted to the speed and scale in which BTR can be developed.
• The sector is resilient too, continuing to perform well in the face of the global pandemic. According to MSCI, total residential investment returns in the UK for the year to 2020 were 3.3 per cent This compares with 4.4 per cent for industrial, -1.4 per cent for office and -14.5 per cent for retail. We expect this trend to continue into 2021. Multifamily housing, for example, does not face the same occupier challenges as the more traditional real estate sectors.

UK build to rent (BTR) potential

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How to ensure delivery of BTR to Northern Ireland and Belfast.

• Growing volumes of institutional investment into UK BTR over the last five years is transforming the PRS in London and regional cities but it has yet to make a mark in Belfast. The fundamentals for Belfast are positive and there is still an opportunity for first-mover advantage. While there are no BTR schemes currently under construction, a number of developers and investors are progressing opportunities.
• Northern Ireland, and in particular Belfast, is well-positioned to secure investment into the BTR sector, given the considerable investor interest already demonstrated, and the underlying demand dynamics. This in turn should help to retain the talent pool of highly qualified graduates and workforce generally who require good quality residential accommodation and thus it should help boost the economic vibrancy of the city centre.
• CBRE research demonstrates that there is a strong underlying market need for further city centre living accommodation and for this to include BTR. Although there will be demand at the upper end of the market, there is also demand across the whole price, affordability spectrum for good quality rental accommodation, with a professional management offer.

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Social housing

In Northern Ireland, nearly 38,000 people were on the social housing waiting list for 2019-2020, and almost 30,000 of these are recognised as being in housing stress. 

• New Decade, New Approach gave commitments on a number of areas key in the social housing sector to include the reversal of reclassification of housing associations as public sector bodies, extending welfare mitigation measures and introducing multi-year budgets for the Social Housing Development Programme (SHDP).
• The sector welcomed the reclassification reversal which was achieved in October 2020 and the welfare mitigation payments were extended in April 2020 with no end date and tabled for legislation. In addition, £162million was allocated to the SHDP in 2021-2022, an increase of £26million from the previous year, and the proposed reform of the Northern Ireland Housing Executive will enable investment in the required refurbishment of existing NIHE stock.
• Housing associations in Northern Ireland now own and manage almost 56,000 homes, with 2,635 new social homes completed and 1,118 new homes provided through co-ownership in 2020, exceeding the target development programme by 30 per cent. The sector provides employment for 3,266 full-time staff, with a total turnover of £382million in 2020.
• The Northern Ireland Federation of Housing Associations’ Sector Global Accounts 2020 reports that the total property assets is  £4.2 billion. Meeting the government targets for new housing has been achieved through utilising these to secure private sector borrowing to supplement the Housing Association Grant (HAG). The net book value funded by HAG has been decreasing over the past number of years, from over 70 per cent to 57 per cent at the end of 2019-2020 and 31per cent of the assets are supported through borrowings.
• Traditionally banks in Northern Ireland, including Bank of Ireland, Barclays, Danske, AIB, Santander, Ulster Bank and The Housing Finance Corporation, have provided funding for the sector with the borrowing profile in this table.
• In 2019, the first private placement form of borrowing on the bond market from UK and North American investors was secured by Radius Housing for £105million, providing longer-term financing at competitive rates.
• Other major bank funding over the past five years has included loans of £135m to Clanmil Housing to underpin an eight-year build programme and the European Investment Bank has provided loans of £280m to other housing associations to include Choice Housing and Apex.

Profile of borrowing

Number of years	2020 and amount in £	2019 and amount in £	percentage
Less than a year	£78,905	£69,580	13.40 per cent
One to two years	£83,944	£139,372	(39.76)
Two to five years	£164,202	£133,955	22.58 per cent
Five or more years	£985,705	£809,690	21.74 per cent
Total	1,312,756	1,152,597	13.90 per cent