Over at least the last five years, the growth of BtR in the UK has been stellar! This has been both in terms of the amount of investment into the sector and the number of purpose-built BtR units coming to market.
Let’s take a look at some of the figures behind such growth, but also review the likely trajectory of the BtR market within the coming few years.
The Recent Past
According to a report published by Homeviews, based on a survey of developers and owners of some 22,000 professionally managed BtR units:
- investment in BtR projects increased from just GBP 1 billion in 2015 to some GBP 3.78 billion in 2020, a 34.7% yoy increase;
- BtR’s appeal to investors seeking long-term reliable income has increased in the face of wider macro-economic disruption, particularly as interest rates and bond yields remain low;
- monthly rental collections exceeded 95% over the last traumatic year, which has helped support pricing and yields;
- the number of investors looking to invest in the BtR continues to grow with over 33% of the capital invested in the sector coming from investors new to the market;
- there has been a dramatic increase in investment into single family homes to rent even as investment into multi-family homes and co-living spaces continue to rise. Some 60% of rental properties in the UK are single family homes and the opportunity to enter the relevant BtR sector is likely to encourage further institutional investment.
Can the Momentum be Sustained?
Investment momentum in the BtR market is expected to continue through 2021 with a number of large portfolio deals already transacted, and a forecast of continued demand from investors keen to participate in the sector.
And whilst demand from occupiers/renters also seems to be consistently strong for new BtR units, there are several issues which are on the horizon in terms of the supply side.
For example, many of the early BtR projects were conversions of buildings built for an alternative use (ie office) or the upgrading of older residential blocks. Clearly, the number of such buildings is finite and there will be increased competition for such stock—and not only for BtR as co-working and co-working/co-living operators are also on the expansion trail.
Furthermore, with the UK economy continuing to pick up again, some of these buildings may be revitalised for their former usage, thereby precluding them from becoming BtR projects.
Another key barrier to entry, especially in London and other major cities, and one we have discussed in our article entitled London councils: what’s the story with Build to Rent projects? It is the administrative and planning approval delays for BtR projects. The question “Do the town planners really have a grasp of the BtR sector?” was posed therein and there needs to be a speeding up of the ways BtR planning applications are processed if the supply side is able to meet demand.
However, one key shift to facilitate additional supply is likely to be that some developers move towards acquiring sites and undertaking ground-up development, albeit with greater associated risk.
Major Investors & New Entrants to the UK BtR Market
Given the attractiveness of the BtR sector to investors seeking long-term reliable income, it’s no surprise that, as mentioned above, some 33% of capital invested in the sector is from investors new to the market.
Overall, investors can in the UK BtR sector can be grouped together as shown below, with the last 2 or 3 years have seen a number of the smaller/medium sized companies acquired by major players:
- medium sized companies who were early entrants to the sector (Muse Development, Packaged Living, Urban or Civic);
- major UK based and European developers (Legal & General (“L&G”), Lend Lease, Quintain, Greystar, Moorfields);
- investment banks with private equity sections, or major fund managers (Goldman Sachs-in partnership with Countryside or Invesco);
- Sovereign wealth funds (GIC from Singapore, CapMan from Finland and funds from Qatar);
- pension fund and/or insurance companies whose mandate only allows them to focus on completed properties (Axa, Canadian Pension Plan Board).
Looking Forward
In the longer-term, the product and service driven BtR model is likely to gain further advantages over the Buy to Let (“BtL”) sector. This is mainly because a typical BtR project offers modern, affordable purpose-built accommodation with a range of professional concierge, recreational or meeting services, and many developments offering all-inclusive bills and most with 24-hour security. See our article entitled The Top Rated BtR Amenities in the UK & their Impact on a Developments Success which refers to the most sought after amenities in BtR developments
In terms of new supply, it is expected that there will be some 20,000 BtR units annually coming to the market over the next few years. This translates to a forecast growth in the total estimated investment committed to professionally managed units in the BtR market from GBP 41 billion in 2020 to GBP 74 billion in 2025.
But there will also be changes in the products delivered by developers. Initially, most projects were focussed on development scale and operational performance but ESG credentials, digital connectivity and post-pandemic induced design changes all will help to reshape the type of BtR units coming to market..
In fact, the events of 2020 further highlighted the investment benefits of purpose built, flexible, actively managed rental accommodation and the ways such projects can support the well-being, integration and diversity of communities.
Which can only be good news for the future of BtR developments!
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