Despite the unprecedented upheavals in the economic and social environment in 2020 the UK residential sales and rental markets performed well–or certainly much better than originally feared in the early days of the pandemic.
By year end, according to the building society and mortgage provider Nationwide, residential property in many places across the UK had hit all-time highs after growing on average 7.3% over the preceding 12 months. The Index of Private Housing Rental Prices continued to track higher, with Homelet reporting that the average rent in the UK is now £981, up 0.2% from December 2020, and +2.9% on 2019.
Other market sectors were mixed with hospitality, office and retail assets particularly facing major challenges due in main to the pandemic lockdowns and its effects on work patterns and lifestyles.
Indeed, there were a number of major, almost seismic, changes which affected the property market and which will continue to change the basic modus operandi of the way people live and work. The effect of such changes will almost certainly have far-reaching, longer term consequences for property but will likely positively affect the BtR sector.
So, let’s have a look just how such changes may be beneficial for the BtR market:
Demand drivers for renting “multi-family” or BtR properties
Traditionally, demand origination for renting multi-family homes can be fairly neatly put into several key groups:
- Potential first-time home buyers, newly co-habiting or just married–and occupying rental accommodation whilst trying to save up for a deposit for their own home;
- Middle management professionals who relocate to an area outside of of their home base, possibly on assignment or a fixed contract (ie project or construction managers, hotel GM’s, medical professionals);
- Millennials whose way of working and lifestyle differs from older generations: they want the convenience and amenities of urban or city living, a community or neighbourhood spirit but without the encumbrance of a mortgage. Indeed, they may not be able to afford to live in city centre or other prime locations: rental is the only option;
- The “silver-haired” generation, namely retirees who may have sold up, cashed out the equity in their homes and now want to live a comfortable, perhaps more transient lifestyle (ie head abroad for a few months a year without the responsibilities and liabilities of owning a home to worry about); and
- Overseas students studying in the UK and looking for a better class rental property–notwithstanding huge growth in Purpose Built Student Accommodation (“PBSA”).
Due to a variety of uncertainties and other factors, the pandemic is likely to result in increased demand for BtR from the aforementioned market segments. Yet it will also stimulate demand from other prospective tenants for BtR properties for reasons which include:
- Fears the virus may reappear in a year or so and there will be a repeat of the way social restrictions were imposed means that the demand for urban living and proximity to neighbourhood conveniences will remain grow;
- A number of people believe it is better to be cash rich, with fewer hard assets, considering that renting a home is a better option for the mid-term;
- Working from home, at least part time, will become the norm for the foreseeable future, meaning that better quality, purpose built BtR accommodation offering more spacious, more user friendly layouts and amenities will see huge, not just steady, demand growth as people combine office and home uses.
BtR supply considerations
There are two clear options for delivering BtR type property to the market.
One is to acquire a site, secure planning permission and construct a purpose built multi-family BtR (in very much the way that the business model of the PBSA sector is developing). Brand new, well designed rental units with added features to meet the demands of the target market.
Another option, almost being presented by default and the economic effects of the pandemic, is converting existing buildings. Of course, older buildings have often been converted to other uses but, in stronger economic and more certain times, the highest and best use for city centre office blocks or shopping centres has almost always been commercial.
But times have changed, and changed dramatically. With advanced technology (Zoom, fibre optic internet, digital storage, work sharing platforms etc) and working from home generally accepted (and preferred by many), the way we combine work and living has to change.
The result? More and more commercial and retail buildings are seeing reduced occupancy rates or are currently being left empty. Many owners and investors are, accordingly, actively looking for alternative ways to recoup or restore their income streams.
In short, the supply of potential BtR type properties is increasing just as the demand curve is on the rise.
Conversion opportunities
At this point in time, there is a clear opportunity for owners of large office blocks or other buildings such as redundant governmental buildings within London or other major UK cities to consider converting them into a BtR scheme.
It’s well understood that change of use and refurbishment schemes can be more risky than fresh builds. Invariably such schemes take longer to complete and are difficult to budget for. BUT such challenges can be overcome and, in fact, can be offset by a number of positive factors:
- Often such buildings are “grandfathered”; that is, if they are demolished, it would not be possible to replicate the same number of storeys, the overall height or same mass/gross floor areas in any new buildings due to planning legislation relating to setback, street shadow etc…not to mention car parking requirements;
- Many older buildings have character and aesthetic appeal which a sympathetic renovation can capitalise on in terms of higher rentals; and,
- Importantly, many office blocks and large retail units are already in prime, well established locations in major cities, and where there is already high demand for rental living in the area.
Prognosis for BtR properties in the UK
A combination of technology, the pandemic and lifestyle changes will reshape the residential rental market.
Demand for BtR properties is on an upwards trajectory. Supply of possibly suitable buildings for conversion is likely to increase but not as rapidly as demand.
Creating a BtR building does not, therefore, always have to be about new development and, consequently, there is likely to be huge potential in converting existing non-residential buildings in prime areas into outstanding BtR investment opportunities.
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