Why is this private equity pioneer getting back into build-to-rent?

“There are very few other UK real estate investment managers that have been in as many of these living sectors as us for as long,” says Mr Ferguson-Davie, who joined Moorfield in 2005 from Lazard’s real estate advisory group. “I can’t really think of anyone else.”

The company started out in PBSA in the late 1990s and built a 5,000-home business called Domain, which it sold in 2007. After the financial crisis in 2008, Moorfield began to snap up blocks of new build flats and convert them into rental homes.

“There was very little residential development going on at all,” the chief executive says, and developers and banks had got stuck with properties that they couldn’t sell.

Moorfield’s first build-to-rent project – although it wasn’t called build-to-rent back then – was Velocity Village in Sheffield, which it bought from administrators. It had been designed for private sale, but Moorfield converted it into a rental scheme.

“I suppose the lightbulb moment was thinking that this was a real opportunity to invest in residential for rent,” Mr Ferguson-Davie says.

“We’d found it hard to compete with the lower cost of capital institutional investors that started coming into the space. It had turned quite quickly to being a really in-vogue sector, and we are a value-add investor”

Moorfield funded the conversion of an office building in Liverpool, The Keel, into rental flats – the scheme opened in 2015 – and went on to do some purpose-built multifamily schemes in Manchester (Duet and Trilogy) and Newcastle.

Then, it sold off the assets within the portfolio to a range of buyers, a process it completed in 2022. (The total value of the portfolio sale has not been disclosed.)

“We’d found it hard to compete with the lower cost of capital institutional investors that started coming into the space,” Mr Ferguson-Davie explains. “It had turned quite quickly to being a really in-vogue sector, and we are a value-add investor.

“We have a certain return criteria we need to invest in anything, and we couldn’t compete with investors that didn’t need such a high return.”

So Moorfield shifted to single-family.

“We’d seen it develop and mature in the US,” the boss says, and Moorfield saw the UK buy-to-let market being targeted by government taxes and the Bank of England, plus the cost of forthcoming environmental regulations.

“We could step in, maybe, do a better job and fill some of that void.”

It started buying individual homes, then shifted to bulk purchases from house builders.

It also began buying up student HMOs.

“The HMO market’s three times the size of the PBSA market… but there’s very little institutional investment or professional investment in student HMOs,” the chief executive says. “We felt that would come too, because investors want to have more exposure to domestic students.”

At a similar time, Moorfield started looking at co-living; it opened its first scheme in Ealing, west London in 2022.

So why does Moorfield see opportunity in these sub-sectors now, if there was none four years ago?

“Because interest rates and yields have reset, and investors are sitting about waiting to see what’s happening in the world, there’s less capital around, and so we can now get a high enough yield on cost for numbers to stack up for us, crudely,” says Mr Ferguson-Davie.

It is a very difficult time for development viability, but that creates its own opportunities.

“There’s very little being built,” he says, “but if you are able to build something now, it will be very special, very rare, and will have scarcity value, both for the customer, but also particularly the investor, which is what we’re really aiming at.”

He defines these potential buyers as “low cost of capital” institutional investors.

“Really what they want, I’ve heard it referred to as ‘elite buildings’,” he says. “It’s actually the very best, that has the latest building safety regulation sign-off, the dual stair-cores, the latest EPC [Energy Performance Certificate] and environmental operational efficiencies, best design, best amenities.”

Rise of the LGPS

Moorfield raises its property funds from investors around the world, including the UK. Typically, these are pension funds, although there are some endowments, foundations and charities.

Occasionally Moorfield brings in a joint venture party when there is a particularly big investment, such as the Greater Manchester Pension Fund on Podium.

“Our investors have historically come from the US, Europe and Japan,” says the chief executive.

“Currently, I would say there’s less appetite from the US because they’re seeing more opportunity to invest domestically, and they have to cater for the currency risk, and they’ve been put off the UK because of all the political upheaval we’ve had ever since Brexit, and our low levels of GDP growth relative to the US.”

There is more appetite from Asia, he says, particularly among institutional investors that are historically less exposed to property and want to increase their weighting. “They’re attracted by the living sectors in particular, comfortable with the inflation-linked cash flows.”

UK investors are entering the space too, including local government pension schemes (LGPS). Last year, Northern LGPS and Local Pensions Partnership Investments bought the 5,478-home PRS REIT single-family portfolio.

Moorfield’s partnership with Greater Manchester Pension Fund is a new relationship; the pension scheme was not already investing in a Moorfield fund before the Podium deal.

The big advantage of local government pension schemes is that they understand the UK, Mr Ferguson-Davie says.

“International investors are generally not so keen to invest in the UK because of the noise since Brexit, and all the political change and our low growth and some of the Labour policies that put people off, and the currency volatility risk.

“LGPS don’t generally have that, and they may even have a mandate to invest locally, and they should have the lowest cost of capital relative to other institutional investors, and they’re pretty active.”

Some of the development viability challenges are unlocked by having LGPS or local authority support, he says.

“It’s not about land value… You often need some measures to help get the project going, and you need a motivated local player to really be behind it. That might be because they own the land, or they’ve provided debt where others wouldn’t, or invest equity alongside you.”

Podium is a good example: it is the first multifamily scheme in the area, near the Old Trafford cricket ground, and the rents will be in the “mid-market zone”.

Single-family

Moorfield’s 300-home single-family portfolio is focused on south and east London, Bristol and, most recently, Alconbury near Cambridge, with an ambition to grow a portfolio in the Oxford-Cambridge Arc.

“We felt that these markets would benefit from strong population growth and economic growth, good transport links and a general strong appetite for renting, and that we could create coherent clusters that would help with management efficiency, but also create a portfolio that could be sold to an investor in future,” says Mr Ferguson-Davie.

Moorfield has not yet decided when to sell the portfolio. “We’re still in the build-up phase, trying to grow it,” he says. “We’ll see what the investment landscape is like, and what the requirements are in terms of scale, as to whether we keep growing or we sell it in the future.”

No one in the UK owns more than 10,000 single-family homes, he says, “which is tiny compared to the US and really only just beginning to scratch the surface. If you think there are five million renters, you ought to have bigger portfolios than that.”

Co-living and discount market rent

Moorfield sees co-living as a “hybrid middle ground” between multifamily and PBSA.

“What we’ve done in Ealing, and would do again, is essentially a sort of studio, student-type product with your own ensuite and your own kitchenette, and then shared amenities and facilities that go beyond that, kitchens, living rooms, co-working space and beyond, that is available to not just students, but everyone. 

“You get a whole range of different people wanting to live there, from students through to graduates and young professionals, through to much older people who enjoy the fact that they can live very centrally.”

The Ealing scheme includes some discount market rent (DMR), which many developers are keen to build instead of, or in addition to, the more established and regulated affordable housing tenures, such as social rent or affordable rent.

“I like DMR,” says the chief executive. “I think there should be more DMR in multifamily as well. Maybe even PBSA.”

The problem with “really high” levels of affordable housing, he argues, is “it pushes the developer to really max out on the bit that’s not affordable, to pay for the affordable bit”.

“So what you see in London over the last decade is basically anything new that was designed for off-plan sales to international investors, not actually the domestic, local market.”

Government policy

Talk to a big multifamily landlord right now and the conversation can get extremely gloomy.

Dan Greenslade, chief financial officer at Get Living, told Inside Housing Living in March that his latest scheme in Elephant and Castle would not be possible to build in today’s economic climate and “I don’t think we would be able to do anything like this anymore”.

Is government restricting the growth of build-to-rent as a tenure?

“It’s just the mixed messages that come through,” Mr Ferguson-Davie says. “It’s successive governments, not just the current one, where there seemed to be some in favour of promoting it as a concept, and understanding that there’s a huge amount of institutional capital, domestic and international, that wants to invest in it, and that therefore could really help create more houses.”

However, he continues, “there’s always someone else in government who thinks that actually, homeownership should be what is prioritised, and incentives are introduced for that side of the tenure option”.

Build-to-rent should not necessarily have a better treatment, he says, but it should be encouraged with “fewer taxes generally, fewer regulations, fewer barriers to entry, which make it more expensive to build”.