11 November 2020

The role of Build to Rent in driving ESG outcomes in the wake of Covid-19

When the UK entered lockdown back in March, markets were hit harder than during the global financial crisis, with swings impacting across sectors and countries. In times of market turbulence, institutional investors tend to retreat to safety, adopting a ‘flight to quality’ mentality by seeking out assets which provide stable income and low volatility.

Among the most long-standing opportunities for investors looking for safe-haven in times of crisis is the UK residential rental market. The sector is widely viewed as defensive and resistant to economic cycles, driven by sound fundamentals, not least being the UK’s chronic and historic undersupply of housing. Between, 2008-09, in the immediate aftermath of the Global Financial Crisis, UK rents rose on average by around 3% and exceeded their pre-downturn peak within only two years.

Dedicated build to rent housing, particularly, has established itself as a highly attractive investment asset class within the residential sector due to its high occupancy and rent collection levels even at the height of the initial lockdown. Further, the sub-sector is drawing attention from a wave of new impact investors who have noticed the assets’ capacity to significantly improve the ESG impact of a portfolio and address some of the immediate challenges faced by society in the wake of Covid-19.

With the build to rent sector only becoming established within the UK over the last decade, homes generally tend to be built to higher sustainability standards. This provides a number of benefits to investors, as — although the up-front costs associated with these buildings are often slightly higher — they will avoid costly remediation as the UK moves towards ‘net zero’ carbon within 30 years. With greater public interest in sustainable living, particularly among the younger demographic who make up a large proportion of BTR schemes, emissions also can be further reduced through behaviour-change initiatives introduced by building managers.

Where the build to rent sector particularly comes into its own, however, is its capacity to create meaningful social impact. The Social Value Portal, an on-line benchmarking tool which allows organisations to measure and improve the social value of their projects, estimates that the UK construction sector could be capturing an additional £15-20bn of social value each year. With the UK’s build to rent sector now standing at almost £10bn, and continuing to grow as new assets are planned, constructed and delivered, , this asset class provides many opportunities to create meaningful social benefit.

The social value contributions are far-ranging and can include everything from support to businesses, employment and mentoring to health and wellbeing and essential infrastructure. These are made most impactful when they are developed in collaboration with local communities and responding to their particular needs. Build to rent schemes, through their sheer size — typically ranging from between 100-1,000 units — bring about opportunities to provide a high number of affordable housing units, in turn making schemes more feasible at planning stage. The type of affordable housing can then be further tailored towards the unique needs of a local area, for instance creating dedicated homes for key workers or social rent tenants.

The build to rent sector also creates a number of opportunities to improve the health and wellbeing of residents as well as communities. Again, due to the scale of build to rent schemes, asset managers are able to encourage health-promoting behaviour among residents, including through the design of fitness and social spaces, promoting active travel (e.g. through cycle storage) and by incorporating green infrastructure into their public realm.

Unfortunately there is still a misunderstanding within the investment community that social value on built environment schemes involves forgoing a commercial return — this is simply not true. The two go hand-in-hand and to ignore social impact considerations of a scheme, particularly in the wake of Covid-19, will unequivocally introduce risk into the build out of a portfolio.

At Legal & General we are working at the forefront of ESG, using our build to rent housing business, particularly, to leverage size and scale in a way which creates meaningful and measurable added-value benefits. Though a wide range of ESG benefits can be provided by the property sector, we recognise that the build to rent sector is unique in its ability to provide a broad range of benefits, ultimately helping our customers to safeguard their investments for the future whilst accruing stable, long-term income return.

Build to Rent

Purpose built private rented residential homes in the UK

Our webcast

LGIM's market experts talk about the resilience of the Build to Rent (BTR) cash flow in a Covid-19 world drawing on data from the L&G portfolio over the last six months