Cushman-Wakefield-Q4-2022-BTR-Report

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Q 4 2022 BUILD TO RENT REPORT

cushmanwake f eld . com

CONTENTS

02 | FEWER FIRST TIME BUYERS

A SLOWER HOUSING MARKET IN 2023

R EN T I NG VS MOR TGAGE

CAPITAL VS INTEREST

END OF HELP TO BUY

A DEEP DIVE INTO WALTHAM FOREST

06 | CONSTRUCTION

07 | RENTAL PERFORMANCE

08 | BUILD TO RENT INVESTMENT

09 | EUROPEAN CITIES YIELDS

FEWER FIRST TIME BUYERS IN 2023

A SLOWER HOUSING MARKET

RENT VS MORTGAGE MONTHLY PAYMENTS NATIONAL HISTORIC ESTIMATES

A slowdown in the housing market is expected in 2023 as a weaker economy , rising interest rates and high in f ation impact buyers ’ con f dence . Market indicators are already showing a slowdown in activity . Buyer demand in December 2022 was down 50% on last year ( Zoopla ), mortgage approvals fell 20% between October and November 2022, with the lowest number of approvals since June 2020 ( Bank of England ), and house prices are falling . According to both the Nationwide and Halifax house price indices , prices have experienced monthly declines for four consecutive months . We expect buyers ’ con f dence to remain subdued throughout 2023, with a continued slowdown in housing market activity anticipated . Historically , on a monthly basis , it has been cheaper to be a homeowner than a renter . However , towards the end of 2022, we saw this reverse , and on average , the monthly payments for new mortgages are now more expensive than monthly rent . Mortgage rates vary according to the size of the deposit , the length of the f xed period , and the length of the term . Assuming an average mortgage interest rate on 75% and 90% LTVs , on a new 5- year f xed mortgage , with a term of 25 years , typical interest rates have increased from 2.1% in February 2020 to 5.2% in December 2022. This has increased average monthly mortgage payments on a typical f rst - time buyer property from £733 in February 2020 to £1,297 in December 2022. RENTING VS MORTGAGE

£2,000

£1,800

£1,600

£1,400

£1,200

£1,000

£800

£600

£400

£200

Jun -11

Dec -11

Dec -17

Jun -17

Jun -12

Dec -12

Jun -15

Dec -15

Jun -13

Dec -13

Jun -21

Dec -21

Jun -18

Dec -18

Jun -19

Dec -19

Jun -16

Dec -16

Dec -14

Jun -14

Jun -10

Dec -10

Jun -22

Dec -22

Jun -07

Dec -07

Dec -20

Jun -20

Jun -08

Dec -08

Jun -06

Jun -09

Dec -06

Dec -09

75% LTV Mortgage

90% LTV Mortgage Rent

Note: mortgage monthly payments based on average price of all properties

£1,297 pcm Average monthly mortgage payment in the UK £1,174 pcm Average achieved rent in the UK

Given that the average achieved rent in the UK is now £1,174 per month , typical mortgage payments are now more expensive than rent .

Source: Cushman & Wakefield, Bank of England, UK HPI, ONS, Homelet Rental Index

FEWER FIRST TIME BUYERS IN 2023

REGIONAL RENT VS MORTGAGE MONTHLY PAYMENTS

REGIONAL VARIATIONS

£1,000 £1,200 £1,400 £1,600 £1,800 £2,000 £2,200 £2,400

-10% -12% -14% -17% -19% -21% -24% -26%

There are regional variations in the discount renters are currently achieving . Using the same parameters as the previous page , renters in the East of England have the greatest discount , at 25%. Meanwhile , in the North West , it remains cheaper to make monthly mortgage payments , with average monthly rent 2% more expensive .

0 £200 £400 £600 £800

2% 0% -3% -5% -7%

CAPITAL VS INTEREST

East of Engla …

West Midlands …

Yorkshire and …

South East

North East

South West

North West

As mortgage rates have risen over the past year , the balance between capital repayments and interest payments has shifted . Using the same parameters as before , average mortgage payments in February 2020 would have meant £297 pcm paid on interest and £436 pcm towards the capital ( average over the first year ); clearly an attractive proposition for owners . However , this has changed substantially , with £938 required towards interest and only £359 required towards the capital repayment .

London

East Midlands

Mortgage ( LHS )

Rent ( LHS )

Difference ( RHS )

CAPITAL VS INTEREST

FEBRUARY 2020

DECEMBER 2022

GREATER DEMAND FOR THE PRIVATE RENTED SECTOR

Capital £359

Interest £297

It is important to note that this is likely to be a short ( to medium ) term situation ; mortgage rates won ’ t always be at c .5%, with interest rates forecast to peak towards the end of 2023. There are also other f nancial bene f ts to owning a home , such as capital growth . However , there are also added bene f ts to renting , particularly the f exibility it o f ers , especially in times of economic hardship . With low consumer con f dence , uncertainty in the sales market , and rising monthly mortgage payments ( of which the majority is interest ), we expect f rst time buyers to be much more cautious about buying , if not deterred altogether in the near term . This is likely to create more demand in the private rented sector .

Capital £436

Interest £938

Source: Cushman & Wakefield, Bank of England, UK HPI, ONS, Homelet Rental Index

FEWER FIRST TIME BUYERS IN 2023

THE REMOVAL OF FISCAL POLICY WILL DETER FIRST TIME BUYERS Help to Buy was a government scheme that assisted buyers (f rst time buyers only from April 2021) to purchase a property , requiring just a 5% deposit . In England , the government o f ered equity loans of up to 20% outside London , and 40% within London . Buyers would then borrow the additional money from a lender . The equity loan meant f rst time buyers had a greater choice of mortgage products as they needed to borrow less from lenders . Since the scheme began in April 2013, it has helped 369,104 buyers ( from Q 2 2013 to Q 2 2022), of whom 84% were f rst - time buyers . Over the last three years , an average of 41,000 f rst - time buyers in England have used the scheme each year . Help to Buy applications closed at the end of October 2022, and the scheme will f nish at the end of March 2023. The end of Help to Buy will no doubt reduce the number of f rst time buyers in 2023, increasing demand for rental homes . THE END OF HELP TO BUY WILL IMPACT THE DELIVERY OF NEW HOMES One of the main reasons Help to Buy was introduced , was the need to boost the construction of new homes post - Global Financial Crisis . The scheme created demand for new build homes , leading to an increase in delivery . The growth in housebuilding created jobs and boosted local economies , just what was needed after the Global Financial Crisis . Help to Buy has accounted for 47% of all new build sales since April 2013. Without Help to Buy supporting the sales and purchases of new homes , there is a question around what will happen to new build delivery . What will f ll the gap ? The number of new build homes purchased using Help to Buy varies greatly by geography . Understanding where is most vulnerable to the end of Help to Buy can provide opportunities for investors . There will be locations with a strong pipeline of homes for private sale where economic headwinds will impact sales rates . Build to Rent has an opportunity to o f er alternate exit routes , in turn boosting rental supply .

HELP TO BUY EQUITY LOANS

22,000

20,000

18,000

16,000

14,000

12,000

10,000

Type something

8,000

6,000

4,000

2,000

Q 2 2021

Q 2 2017

Q 2 2015

Q 2 2013

Q 2 2018

Q 2 2016

Q 2 2019

Q 4 2021

Q 4 2017

Q 2 2014

Q 4 2015

Q 4 2013

Q 4 2018

Q 4 2016

Q 4 2019

Q 4 2014

Q 2 2022

Q 2 2020

Q 4 2020

Number of Help to Buy Purchases 369,104 84% Were First Time Buyers

Source: Cushman & Wakefield, GOV.UK

FEWER FIRST TIME BUYERS IN 2023

A DEEP DIVE INTO WALTHAM FOREST

Within London , Help to Buy has played a considerable role in the outer boroughs , in Zones 3–6, both from the perspective of enabling f rst time buyers to access the sales market as well as providing developers with greater certainty in sales momentum . Waltham Forest is a great example ; Help to Buy has been used on 81% of all new home sales over the past decade . This re f ects the more accessible price point of new homes in this borough , the greater prevalence of larger , multi phased schemes being delivered , as well as the growing demand from f rst time buyers in this location . The increasing popularity of the borough also means that it is attracting substantial swathes of new renters , as well as potential f rst time buyers . This , together with the price point and greater availability of developable land , has attracted a signi f cant number of Build to Rent investors over recent years ; there are now 13 Build to Rent schemes complete , under construction , or on their way through the planning system . As part of an exciting redevelopment of the shopping center , Sigma Capital has committed to 355 Build to Rent units at The Patchworks in Walthamstow and nearly 400 Build to Rent units at Long Harbour . Closer to Walthamstow Wetlands , on Blackhorse Road , L & G and Greystar are already experiencing huge success at their schemes , Blackhorse Mills and Equipment Works , both in terms of strong occupancy rates and high rental growth rates . Despite an increasingly healthy pipeline of Build to Rent development , there is clearly scope for more , given the depth of demand in this location . There are over 28,000 renters aged 26-40 already living in the borough . There are nearly 18,000 private renters earning well over £40,000 per year , making this a relatively a f uent renter population . It is a great example of where Build to Rent can step in and provide a greater choice of high - quality accommodation to this rapidly growing renter population .

WALTHAM FOREST NUMBER OF NEW BUILD SALES VS HELP TO BUY SALES

150

129

107

Type something

Q 4 2…

Q 1 20…

Q 2 20…

Q 3 20…

Q 4 20…

Waltham Forest Help to Buy Waltham Forest New Build Sales

WALTHAM FOREST INCOME DISTRIBUTION BY TENURE

10% 13% 15% 17% 19% 21% 23% 25%

Type something

0 2% 4% 6% 8%

<£10 k

£15 k - £19 k

£60 k - £69 k

£30 k - £39 k

£40 k - £49 k

£10 k - £14 k

£20 k - £29 k

£50 k - £59 k

£70 k - £99 k

£100 k +

Ower Occupied Privately Rented

Source: Cushman & Wakefield, GOV.UK, UK HPI, Experian

CONSTRUCTION

A SLOWDOWN IN NEW HOMES DELIVERY

ENGLAND CONSTRUCTION STARTS & SALES

10 K 15 K 20 K 25 K 30 K 35 K 40 K 45 K 50 K 55 K 60 K

100K 133K 167K 200K 233K 267K 300K 333K 367K 400K

The construction of new homes in England is expected to have slowed as housebuilders face economic headwinds . When the residential sales market slows , housebuilders reduce construction . This is partly a consequence of the perverse incentives that the supply - demand dynamics of our housing market create for housebuilders , which also deepens its cyclical nature . In London , construction starts for homes for private sale have been slowing for several years . This market has faced various risks over the last few years , including Brexit , the pandemic , the end of Help to Buy , increased construction costs , and various economic and political headwinds . This , combined with the growth in the private rented sector , has led to a decline in construction starts on homes for sale in London . Build to Rent delivery , on the other hand , remained strong in 2022, with 5,640 Build to Rent starts , 30% more than in 2021. Last year , Build to Rent accounted for 31% of all new home starts . This is higher than in 2021, when only 26% of starts were Build to Rent . With a large amount of capital still targeting the living sector , we expect Build to Rent to play an important role in the delivery of new homes across the UK , particularly when the sales market is more vulnerable . While there are still challenges , most notably debt and construction costs , the strong fundamentals of the rental market will continue to attract investment .

Starts ( LHS )

0 33K 67K

Sales (RHS)

0 5 K

Q 2 2011

Q 2 1997

Q 2 1995

Q 2 2021

Q 2 2017

Q 2 2012

Q 2 2015

Q 2 2013

Q 2 1998

Q 2 2018

Q 2 1996

Q 2 1999

Q 2 2019

Q 2 2016

Q 2 2014

Q 2 2010

Q 2 2001

Q 2 2022

Q 2 2007

Q 2 2020

Q 2 2002

Q 2 2003

Q 2 2005

Q 2 2008

Q 2 2006

Q 2 2009

Q 2 2004

Q 2 2000

Starts ( LHS )

Sales ( RHS )

LONDON CONSTRUCTION STARTS

35,000

30,000

25,000

20,000

Type something

15,000

10,000

5,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Build to Rent Starts Build to Sale Starts All Starts

Cushman & Wakefield, Molior, UK HPI, GOV.UK

RENTAL PERFORMANCE

RENTAL MARKET OVERVIEW

AVERAGE MONTHLY RENTS

Throughout 2022, the UK has experienced strong rental growth , largely driven by the ongoing imbalance between supply and demand . The RICS December 2022 residential survey showed a net balance of +28% of respondents reporting an increase in demand in December ( albeit the least elevated f gure since February 2021). New rental supply continued to fall , with a net balance of -24% of respondents reporting a decline in landlord instructions . Rents in the UK excluding London increased from £893 pcm in December 2021 to £977 pcm in December 2022, a 9.4% annual increase . In London , where the supply - demand imbalance has been much greater , rents increased from £1,752 pcm to £2,007 pcm , an annual increase of 14.6%. Annual rental growth varied across the UK , with London experiencing the largest annual growth (14.6%), followed by Scotland (13.8%) and the North West (11.1%). Yorkshire and the Humber (7.2%), Northern Ireland (6.9%) and the North East (6.6%) all experienced the lowest growth , albeit still healthy . In December 2022, some regions experienced a small monthly decline in rent . Whether this is a seasonal e f ect will become clearer in January 2023, but the supply crisis makes a strong case for rents remaining strong in 2023.

£2,000

£1,800

£1,600

£1,400

£1,200

£1,000

£800

Jun -21

Aug -21

Feb -21

Dec -21

Oct -21

Apr -21

Apr -19

Jun -19

Aug -19

Feb -19

Dec -19

Oct -19

Dec -22

Apr -22

Jun -22

Aug -22

Feb -22

Oct -22

Aug -20

Feb -20

Dec -20

Apr -20

Jun -20

Oct -20

UK Excluding London London

ANNUAL RENTAL GROWTH

6.6%

North East

6.9%

Northern Ireland

7.2%

Yorkshire & Humberside

7.4%

East Midlands

7.5%

East Of England

9.2%

Wales

Type something

Average rent in the UK excluding London £977 per month 9.4% Increase from December 2021

10.0%

South East

10.0%

South West

10.9%

West Midlands

11.1%

North West

13.8%

Scotland

14.6%

Greater London

Source: Cushman & Wakefield, RICS, Homelet Rental Index

INVESTMENT VOLUMES

INVESTMENT

BTR INVESTMENT VOLUMES ( BN ) UK

An estimated £4.01 bn was invested into Build to Rent in 2022. This is 5% below 2021 levels , at £4.21 bn . Strong investor momentum continued throughout the first three quarters of the year , with investment volumes 61% higher than the same period in 2021. Economic and political headwinds slowed investment volumes in the final quarter of 2022, with an estimated £330 million invested . 2023 is likely to see both a flight to quality assets and an openness to deal structures that were previously not considered . As the cost of living impacts renters , we anticipate a greater focus on ' affordable ' mid - market products , particularly as developers and housebuilders consider their exit options on part built stock and larger strategic land holdings .

£1.02 £1.61

£0.66 £0.89

£0.60 £1.17

£1.92 £0.33

Q 1

Q 2

Q 3

Q 4

WHAT TO WATCH IN 2023

2021 2022

Openness to deal structures that were not previously considered

£4.01 bn Invested in 2022 5% Lower than 2021

Growth in low amenity ' affordable ' Build to Rent schemes

Build to Rent investors seeking opportunity in a slower sales market

Source: Cushman & Wakefield, RCA

Cushman & Wakefield, RCA

EUROPEAN CITIES

CUSHMAN & WAKEFIELD RENTAL INDEX

Sep -22

Dec -22

Net Initial Yield (%)

Country

Market

Cap Value psf

Yield Trend

Austria Belgium Denmark

Vienna

3.00% 3.45% 3.00% 3.20% 3.00% 2.90% 3.10% 2.75% 2.20% 3.75% 3.25% 3.50% 3.00% 2.75% 5.00% 4.50% 3.00% 3.00% 3.30% 3.40% 3.10% 2.00% 4.25% 3.25% 3.90%

€ 461 € 296 € 801 € 810 € 1,041 € 749 € 810 € 879 € 1,368 € 862 € 680 € 496 € 797 € 995 € 399 € 294 € 644 € 619 € 509 € 470 € 583 € 2,322

3.00% 3.45% 3.25% 3.40% 3.00% 3.10% 3.30% 2.90% 2.30% 4.00% 3.50% 3.75% 3.25% 3.00% 5.25% 4.50% 3.15% 3.15% 3.60% 3.70% 3.40% 2.10% 4.25% 3.50% 4.00%

€ 461 € 310 € 740 € 762 € 1,041 € 701 € 761 € 833 € 1,318 € 808 € 639 € 463 € 736 € 945 € 294 € 613 € 590 € 462 € 427 € 526 € 2,206 € 411

- -

Brussels

↑ ↑

Copenhagen

Finland France

Helsinki

Paris Berlin

↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑ -

Germany Germany Germany Germany

Frankfurt Hamburg

Munich Dublin

Ireland

Italy Italy

Milan Rome

Netherlands

Amsterdam

Norway Poland Portugal

Oslo

Warsaw Lisbon *

Spain Spain

Barcelona

Madrid

Sweden Sweden Sweden

Gothenburg

Malmo

Stockholm

Switzerland

Zurich

UK UK UK

Edinburgh

€ 550

€ 547 € 1,114 € 532

↑ ↑

London

€ 1,200

Manchester

€ 490

Cushman & Wakefield Prime PRS Properties * Q 3 2022 latest reporting

CONTACTS

JONATHAN STICKELLS

MARK CLEGG

INTERNATIONAL PARTNER

UK HEAD OF RESIDENTIAL CAPITAL MARKETS MARK . A . CLEGG @ CUSHWAKE . COM

UK HEAD OF RESIDENTIAL VALUATIONS JONATHAN . STICKELLS @ CUSHWAKE . COM

HELEN GRAY

MILLIE TODD

PARTNER

ASSOCIATE DIRECTOR

UK HEAD OF BTR CONSULTANCY HELEN . GRAY @ CUSHWAKE . COM

UK HEAD OF RESIDENTIAL RESEARCH MILLIE . TODD @ CUSHWAKE . COM

LEWIS SMITH

PARTNER

BTR FUNDING & DEVELOPMENT LEWIS . SMITH @ CUSHWAKE . COM

Disclaimer : This report should not be relied upon as a basis for entering into transactions without seeking speci f c , quali f ed , professional advice . Whilst facts have been rigorously checked , Cushman & Wake f eld

can take no responsibility for any damage or loss su f ered as a result of any inadvertent inaccuracy within this report . Information contained herein should not , in whole or part , be published , reproduced or

referred to without prior approval . Any such reproduction should be credited to Cushman & Wake f eld .

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