Originally published in Business Moneyfacts magazine
Written by Georgie Crocker, Broker at Arc & Co.
Historically, the UK has had a strong focus on home-ownership, however the combination of house prices increasing, Covid, Brexit, rising inflation, rising living costs etc., has resulted in many having to rent later in life. Tenant demand is rising and the private rented sector is struggling to meet it; recent Zoopla figures show that demand for rental homes in the UK is 43% higher than the five year average. The Build to Rent sector is therefore rising to fill part of this gap, accounting for 20% of all new housing in England in 2021. Tenants’ needs have changed, with a higher priority being placed on higher specification, multipurpose residential space with social living spaces. The rise of PBSA has also set high standards of living compared with the traditional house share. The sector comprises of new purpose-built properties for the modern residential rental market, offering a higher specification than most standard buy-to-lets. New figures released by global real estate advisor, CBRE, show a record investment in the UK’s Build to Rent sector of £4.1billion in 2021, £2.1billion of which was during Q4, with over 205,000 new homes completed or under development currently. Most of these Build to Rent schemes are in cities with increased housing targets.
Many believe that the pandemic forced the Build to Rent sector to react and adapt accordingly to the changing needs of renters. Renters are being more prescriptive around what they require from a home in the post-pandemic environment – work from home flexibility, proximity to amenities, community, flexibility, working space etc. Developers have raced to provide new urban schemes that offers just this, through build to rent properties that offer on-site facilities such as gyms, concierge services, 24-hour security and communal work and living spaces. Standards are generally higher than a privately rented property. As the Build to Rent sector matures, so too are the expectations of renters and investors. Build to Rent has become an established product in its own right, offering an inviting urban lifestyle which has led to it becoming an institutional grade investment. Research from estate agency Ascend Properties revealed that planning permission requests for Build to Rent units across the UK rose 52% during the pandemic – this can be attributed to the low interest rates, commercial property yielding low returns and the housing shortage making Build to Rent an attractive proposition for investors.
Clearly, the increased amenities offered with Build to Rent properties comes at a premium. Research conducted by Ideal Flatmate shows that on average, Build to Rent accommodation is 15% more expensive than a buy-to-let property or renting privately. With attitudes in the private rental sector changing post-pandemic, there has been an increase in demand for more expensive rentals with more amenities. So what does this mean for developers? BTR is an increasingly lucrative opportunity for developers and investors seeking higher rental yields from premium new build properties. Granted, purpose-built properties require a high capital investment to complete, however, developers and investors looking to maximise returns are benefitting by spending more at the outset as the increased amenities offered results in higher rental yields. To offset the risk, developers have been able to seek forward funding or formal sale due to changing appetite from institutional investors which results in a lower return for the developer but with the benefit of lower overall exposure. Other benefits of new builds include considerably lower running costs as they are typically more energy efficient and maintenance costs are reduced compared to older buildings. These qualities also make them suitable for ESG and green financial products, further increasing alignment for funding from an institutional point of view.
The majority Build to Rent investment has gone into the traditional city centre apartment blocks within urban areas, targeting young professionals. However, the British Property Federation revealed that the Build to Rent pipeline increased by 8% in 2021, with developments in regional cities significantly outdoing London. 12,000 Build to Rent homes began construction across regional cities in Q3 2021, the highest figure recorded. According to Savills, major cities such as Manchester, Liverpool, and Brighton are at the heart of the boom in investment for Build to Rent schemes. The latest figures from the BPF show there are now 88,893 Build to Rent properties in London and 116,632 elsewhere in the country. In 2022, it is expected that there will be further increases in the suburban Build to Rent market with a high percentage of deals focused on secondary cities and suburban towns, owing to demand from tenants as well as developers and investors wanting to diversify their portfolios. Increased competition for land may also play a part in this.
The Build to Rent sector clearly has a lot still to deliver and is still maturing. However, the record investment of the past two years has reflected the sector’s ability to weather the impact of the global pandemic. Renters expectations of living standards, increased appetite from institutions on funding, forward fund and formal sale makes it attractive to developers. The demand in the current post-pandemic (we hope) environment, indicates that the lifestyle offered from Build to Rent properties shows sustained growth, throughout 2022 and beyond. Where there is demand, developers and investors will continue to strive to meet it.