What is SFR?
Single-family rental (SFR) units are houses or apartments that are designed to be rented by a single family or individual. These homes can take many forms — detached homes, townhomes, flats — and can be found in almost any market in the world.
SFR is different from multi-family housing (MFH), which is a group of separate units for residential inhabitants that are contained within one building, or several buildings within one complex. An apartment building is a common example of MFH.
We can also differentiate between constructing new SFR properties, through build-to-rent (BTR) projects, and existing SFR stock (in non-contiguous or ‘scattered’ locations). The existing stock has the potential to be acquired, refurbished and held to generate rental income as part of a scalable portfolio.
SFR is an established asset class in the US, but still largely untapped as an investment in Europe where the residential sector estimated at about $50 (€40) trillion1.
Who invests in SFR?
Investment in SFR is dominated by the retail market which includes individual property landlords/investors and medium-scale owners or operators. However, in the US it can also be accessed through public markets (indirect) within REITs or securitised SFR pools2.
While the single-family market (both rented and owner-occupied) makes up 98% of the residential market in Europe, institutional investors are only accessing about 2% to 3% of the market today — primarily through MFH and BTR-type investments or through secondary portfolio acquisitions. This presents a huge opportunity, as unlocking this asset class can provide stable, consistent streams of income at higher yields than we’ve been seeing in fixed income markets, while also offering attractive returns that are uncorrelated to equities.
Why asset allocators are shifting to SFR
Demand for rental housing has never been higher. In Britain, less than 10% of homes were rented in the mid-1990s, but today the share is closer to one in five. In Germany, the split between owning and renting homes is about 50/50.
The SFR phenomenon has clear economic drivers, especially across Europe where housing supply is unable to keep up with increasing demand and many cities face a large deficit. While it’s true that homeownership is becoming increasingly unaffordable, some millennials simply choose to rent as this option offers less maintenance challenges, location mobility and flexibility. At the same time, there is a clear mismatch between renter expectations and what typical landlords can offer, opening up significant opportunity for high-quality, refurbished accommodation in city-centre and commuter locations.
The multi-family sector – essentially purpose-built rental apartments – has been a relative out-performer for institutional investment in real estate over the past 15 years, but intense competition in Europe has been pushing yields down, with the average prime multi-family yield being compressed by 120 basis points since 2012 to reach a record low of 3.24% in 20203. Amplified by evolving residential preferences (people seeking less density, more living space with outdoor access and feeling less inclined to be located near their workplace), investor demand will inevitably shift in support of the single-family market.
Real estate has always been a flight to safety due to its tangible nature and also used to diversify portfolios, but we are still only just uncovering major opportunities within residential real estate. Investing in SFR can provide cyclical defensive positioning (less impacted by down cycles), as well as capital preservation for conservative investors looking for alternative ways to deploy capital. We expect SFR to have the highest growth trajectory of all real estate asset classes in the years to come.
How do you create scalable SFR portfolios?
Institutional capital has already placed bets on SFR over the past decade and it has become a well-established asset class in the US. As for Europe, we saw Goldman Sachs buy Thistle BTR property portfolio in early 2021 — 918 units across North-West England4 — but still 98% of the market remains untapped. Why?
Institutional SFR investment requires partners, technology and resourcefulness. Building these portfolios is operationally intensive and requires large volumes of data, automation and technological innovation. Some of the challenges investors face include:
- Identifying the best rentals in prime locations at speed and scale
- Purchasing them efficiently to build large portfolios
- Ongoing property lettings and management for maximising rental yield and capex over the long term
These are only some of the reasons why investing in SFR requires an end-to-end solution, utilising data and implementing efficiencies across the entire value chain. We have built the first technology-led residential real estate platform in Europe, which enables us to address every step in the process — from sourcing, acquisitions and portfolio management through to lettings and property management.
SFR is now a viable and attractive alternative to other real estate investments. Using our tech-enabled platform, it’s now possible to up-cycle existing housing stock, refurbish and create large portfolios of single-family rental homes across Europe.
1Savills Research as at September 2021
2CBRE, U.S. single-family build-to-rent housing sector, September 2021
3Savills, Spotlight: European Multifamily, published March 2021
4Propertywire: Gatehouse Bank sells property portfolio to Goldman Sachs for £150m, published January 2021
Looking to deploy capital into SFR in Europe? Get in touch with our investment team to find out more.
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