Build to rent investment funds have become increasingly popular in recent years as a way to gain exposure to the residential property market. These funds invest in purpose-built residential blocks, providing high-quality rental accommodation in major cities. With strong tenant demand and stable income streams, build to rent can offer solid returns, but there are also risks to consider. In this article, we explore the key benefits and risks of investing in build to rent funds, and assess whether they deserve a place in a diversified investment portfolio.
Build to rent funds provide exposure to a growing asset class with strong demand fundamentals
The private rented sector has expanded rapidly in many countries, driven by factors like rising house prices and more flexible lifestyles. Millennials in particular are staying in rented accommodation for longer before buying their first home. Build to rent taps into this demand by providing well-managed, purpose-built rental accommodation. Funds investing in these types of assets can benefit from the sector’s strong growth potential. In the UK for example, the build to rent market has seen huge expansion, with over 160,000 build to rent homes built already or in the pipeline. With housing undersupply still a major issue in many major cities, build to rent funds offer an opportunity to meet this unsatisfied demand.
These funds generate stable, index-linked income streams highly attractive to investors
A key feature of build to rent funds is that they invest in high-quality rental properties, usually targeting the mid-market. Tenants are professionals who value amenities and good service over lower rents. This helps generate more stable and predictable income streams. Build to rent leases also often include indexation clauses, meaning rents increase in line with inflation each year. This provides a natural inflation hedge. With long average tenancies, low void periods and indexed leases, build to rent funds can generate the secure, growing income streams so sought after by investors in the current low yield climate.
Professional management and economies of scale can enhance returns
Build to rent funds are actively managed by experienced property professionals. This expertise helps ensure properties are well-maintained and rented at optimal prices. Funds investing at scale can also benefit from significant economies, negotiating discounts on furnishings and fittings for example. Technology can be leveraged to improve tenant screening and rent collection. While management fees impact returns, the hands-off nature of these funds and the potential boost from professional management may enhance risk-adjusted returns for suitable investors.
Concentration risk can be an issue, and liquidity is lower than public funds
While diversified across properties, build to rent funds remain concentrated in a single real estate sector and geography. Investors backing funds focused on one city’s rental market may suffer if that local economy underperforms. Liquidity is another risk, as investment lock-ups of 5+ years are common. Unlike REITs, build to rent funds can’t be readily traded. While suited to long-term investors, lower liquidity makes build to rent funds less appropriate for investors who may need ready access to their capital.
Build to rent funds offer exposure to an increasingly important real estate sector providing stable and growing income streams. However, sector and geographic concentration coupled with lower liquidity mean these funds may suit longer-term investors seeking diversified property exposure as part of a broader portfolio.