The build-to-rent market has firmly established itself a core operational real estate asset class, and proved the investment case for the important role rental stock needs to play in future UK housing supply. It remains a compelling prospect for developers and financiers.
The long-term structural imbalance within the UK housing market guarantees strong demand for for-sale residential assets, from both first-time buyers and those scaling the property ladder. Rightmove data showing a further 0.5% jump in house prices in February 2021 underlined the fierce demand that persists within the UK property market, stoked by the government’s stamp duty holiday but ultimately driven by the fundamental issue of undersupply. This serves to de-risk developers and lenders’ investments.
By contrast, the impact of Covid-19 on rental markets has been well publicised. Renters have been disproportionately negatively affected by the pandemic and the movement of young professionals and office workers away from city-centre locations has reduced demand in core rental markets. But there are both short- and long-term grounds for optimism.
The substantial growth in the UK’s private rented sector over the past two decades was initially driven by private buy-to-let landlords, financed by banks. However, even prior to Covid, increases in stamp duty and withdrawal of mortgage interest tax relief had already begun to dampen down BTL activity. Meanwhile, institutional BTR providers have been actively encouraged, following in the footsteps of the mature ‘multi-family’ market in the US and countries like Germany.
The pandemic has presented an opportunity for financial sponsors and non-bank lenders to seize even more market share in the provision of high-quality rented accommodation. Individual BTL landlords are less well-equipped than institutional owners to wait out the temporary storm of falling yields and cashflows, or to offer the quality of product, digitised experience and lifestyle services with which professional providers have now set the bar.
The longer-term prospects of the BTR market provide the rationale for capitalising on this opportunity. As the vaccine roll-out accelerates and we return to some degree of normality, the enduring appeal of city living and working will revive demand among traditional renters. Population growth and a shift towards smaller households will increase the aggregate volume of homes required, with rental properties accounting for a significant proportion of the new stock.
Emerging living trends, such as co-living, will create new pockets of demand for BTR offerings. Having experienced living in professionally managed student accommodation and BTR city-centre accommodation, a generation of young couples moving onto the next stage of their life with a young family are also now increasingly looking for the same professionally managed lifestyle experience. BTR providers are increasingly moving into suburban locations to meet this demand with more traditional housing, not just apartments. Finally, we see a trend for a mid-tier BTR model, with an affordable price point for middle-low-income households.
BTR schemes can also provide an opportunity for investors and operators who are increasingly concerned with mitigating and optimising the environmental and societal impacts of the assets that they build, own, lend to or manage.
Modern methods of construction (MMC) are widely recognised by the industry and formally promoted by the UK government as a way to build higher-quality homes faster, with a lower environmental impact (through typically lower embedded carbon), while supporting high-skilled manufacturing jobs. The BTR sector has been a pioneer in the modular delivery of housing structures and components that are pre-manufactured off-site and assembled into high-rise buildings. Developers and investors in this space have the best opportunity to further push the boundaries in terms of the scale, versatility and quality of new residential schemes built using MMC.
Build-to-rent residential developments should therefore continue to play a significant and complementary role in the portfolios of developers and lenders active within the UK housing market. The longer-term fundamentals underpinning rental demand, several potential growth sub-sectors and the suitability of these schemes as a use case for MMC mean that BTR will remain a fast-moving frontier of the UK residential development market over the coming years.