UK BUILT-TO-RENT (BTR) SECTOR

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Market size

Over the last five years, more than €20bn has been invested in the BTR sector in the UK. More than 50% of the investment has been by the top 20 investors, with London, Manchester, and Birmingham as well as the Midlands accounting for nearly 70% of total investment. Research from the British Property Federation (BPF) and Savills projected the number of completed BTR homes could increase five-fold to reach 380,000 by 2032, with the sector worth £170bn.

Pipeline. In its BTR Q2 2023 report the BPF said the number of BTR homes complete, under construction, or in planning stood at over 253,402 in June 2023, up +12% on Q2 2022 with the regional market (+13%) growing faster than London (+10%). Nationally, the number of units under construction increased by +9% YoY to 53,487 in Q2 2023. The total number of BTR homes in planning increased by +13% between Q2 2022 and Q2 2023 to 111,815. The number of homes in long-term planning has increased by +40% since Q2 2022. However, BPF says build cost inflation and wider economic uncertainty looks set to slow down delivery with construction starts totalling 5,549 units in H1 2023, down -55% on H1 2022.

Investment. Savills said Q2 2023 investment transaction volume totalled £1.26bn. At the half year stage, H1 2023, investment volumes stood at £2.1bn.

Trends & Outlook

Funding models. BNP Paribas says that in more mature markets such as the UK and Germany, most BTR assets are financed using a forward-funding process. From an investor’s perspective, as a reward for forward funding and de-risking the development, BNP Paribas says most investors can expect a discount of 5%-15% of the aggregate development market value (according to location) and therefore a higher return thanks to their greater risk exposure. In the UK, two thirds of BTR assets are forward funded while the remainder are standing stock

Yields. Since 2015, BTR yields have shown significant risk premium over 10-year gilt rates, with the exception of the sudden 4% jump in risk-free rate over a very short period around September 2022. Longer-term, Knight Frank expects to see yield compression driven by strong investor demand and the supply/demand dynamics of the sector which continues to drive competition for assets. The prospect of weaker rental growth in other property sectors is also likely to lead more investors to pivot to residential in search of long-term income.

Energy efficiency. According to BTR News, highly energy efficient BTR buildings are at the top of the list for institutional investors when it comes to selecting opportunities, particularly pension funds which are acutely focused on future proofing portfolios, given their long-term hold play.

Single-Family Housing. In its BTR Q2 2023 report, the BPF says Single-Family Housing in BTR continues to expand strongly. As of June 2023, there were nearly 28,000 Single-Family Housing homes under construction or in the planning pipeline, making up 12% of all BTR homes. Savills says Single-Family Housing will take an increasing share of the UK BTR market, growing from 12% to 18% over the next 10 years.

Regional markets. BNP Paribas estimates that around 75%-80% of Q1 2023 investment activity was allocated outside of London around major regional cities such as Manchester and Birmingham, and into Single-Family Housing in suburban areas.

Challenges

Planning. The central issue facing the developers of BTR suburban communities, which provide a range of services solely for residents’ use, is demonstrating how a substantial mixed-use development, the co-living components of which are usually created ‘exclusively’ for its residents, as reflected in their service charges, can benefit the wider community.

Rent controls. According to BNP Paribas, a potential issue for the BTR sector is the threat of widespread rent caps, which have already been introduced in some form in Scotland and Dublin. The main concern is that having policy dictate rental growth rather than the market forces will dampen investment appetite and, therefore, supply.

Cost of debt. In its Q2 2023 BTR Report (Jul 2023), Cushman & Wakefield says the cost of borrowing is at the highest level for the last 15 years, and the outlook remains uncertain, fuelled by the recent disappointing inflation figures. While investors continue to seek exposure to the market, the increased cost of debt continues to put pressure on deal structuring, particularly in the forward funding market.

Regulation. As well as the economic backdrop, Cushman & Wakefield says discussion around increasing regulation in different forms is also continuing to cause investor uncertainty. Further, regulation in the rental market is on the horizon – for example, the anticipated requirement for a secondary means of escape has meant many potential forward funding opportunities have had to revise planning consents, again causing further delays.

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