The boom in build-to-rent (BTR) development has been much hyped over the last decade, but what is the reality for investment prospects in the sector? We take a closer look at the deals, trends, issues and policies that investors need to understand in order to make informed decisions about BTR.
Some £4.6bn of BTR investment deals were transacted last year in the UK, boosted by a strong final quarter and a new record high, according to Knight Frank data. BTR is the terminology in the UK which most closely equates to US multi-family.
The sector has seen year-on-year investment volume growth almost consistently since 2016. The market also remained robust during the challenging COVID years compared to other real estate sectors, although it is still a nascent sector in the UK when compared with the more established US multi-family.
A number of large deals helped boost the 2023 figures, including Blackstone’s £819m purchase of a portfolio of houses from Vistry Group specifically for rental, which has been followed up by a second deal in 2024 for 1,750 homes.
There is a huge ongoing demand for housing in the UK, making the wider 'living' real estate sector of particular interest to investors. Demand for rental properties in the UK remains strong, and the BTR sub-market is evolving and is partly shaped by the UK’s economic and regulatory landscape.
A historic lack of housebuilding has contributed to a significant undersupply of homes in general. Some commentators have said they expect it could take decades to correct that shortage. Recent interest rate rises have also made buying a home more expensive, which has added to the rental demand. JLL predicts an average annual rental growth of 4.2% for the next four years.
BTR development risk and return
“BTR remains a relatively new asset class and represents only a small proportion of the overall stock of rental properties in the UK. As a result, many investors looking to enter the sector are having to acquire stock as development projects, rather than purchasing stabilised assets," says Andy Barnard, Partner, Trowers & Hamlins.
"That is not a bad thing necessarily, but the development process carries a different risk profile from pure investment. Some investors are willing to embrace that, and the potential rewards that come with it. Others will want to buy into projects later when part of that risk is off the table.”
There are different development options. “We’ve seen some of our more adventurous clients take development risk through a developer JV,” says Nick Harrisingh, Partner, Trowers & Hamlins.
“The most adventurous take on sites without planning permission to get the uplift in value which securing planning delivers.”
With the office and retail sectors undergoing a period of adjustment due to changing occupier demands, converting empty buildings into BTR is also an option being considered.
Buying an existing, income-producing asset is also a lower-risk investment option as the market matures.
“There are more operating assets in the market now, which means you are buying into an income yield. The question is whether or not that income yield is attractive compared to other investment options,” says Harrisingh.
Single-family rental
Another notable trend is the emergence of single-family rental as a sub-sector. The UK market has traditionally centred on city centre apartment blocks.
Portfolios of single-family rental, typically individual houses rented to one family, saw a surge in investment last year, according to Knight Frank data, accounting for 40% of the investment market.
Higher mortgage costs and an end to Government-backed schemes to support first-time buyers have resulted in subdued house sales. As a result, some housebuilders have secured bulk sales of new houses to BTR investors for rental stock.
The Blackstone/Vistry deal is an example; the portfolio purchased made up of yet-to-be-built houses.
Impact of price of debt on land values
The higher cost of borrowing has been a factor in the more subdued levels of BTR development activity we have seen in the past year. However, there is now increased market certainty that interest rates have peaked and the trend over the next 12 to 24 months will be downwards, albeit with some uncertainty as to when rate cuts will materialise. This should result is a gradual uptick in activity, but this in turn depends on whether landowners will accept the new market price for their land sales, taking into account the cost of development and end value.
“And that is where the market has got a little bit sticky at the moment, rather than being held back specifically by the price of debt,” says Barnard.
“Sky high inflation at the same time has not helped, but at some point, the market will adjust to new pricing. If the price of debt does happen to come down a little bit, as we're hoping later in the year, that will also help.”
Renters reform bill
A victim of the unanticipated early call of the UK General Election, investors will have heard of the Renters Reform Bill, which was moving through the legislative process in the English parliament. We expect Labour (if successful) will bring it back to the table very quickly. It could be seen as adding risk to BTR investment but we anticipate that the changes can be managed by a quality operator and professional advisers.
Other parts of the UK have different rental laws, but this Bill will remove the possibility of no-fault evictions. Under existing legislation, a landlord can terminate a tenant’s lease regardless of whether they have breached its terms.
While disruptive tenants or those with poor rent payment records can still be removed, no-fault evictions will not be permissible. For a well-operated BTR asset with a good process for finding the right tenants, this isn’t necessarily an issue.
“But it highlights the importance of having the right operator in place and the right structure for operations,” says Harrisingh. “BTR is an operator-led model, and that is where the value lies.”
Some landlords would use no-fault evictions to raise rents; for BTR operators, retaining tenants is often more cost effective because of the associated costs from marketing and leasing each flat.
Safer buildings
The development landscape in general, and also for BTR, is challenging due to high material and labour costs, slow planning, and there are now additional regulations to navigate because of changes to the Building Safety Act.
These changes are designed to safeguard those living in residential apartment blocks in the event of a fire, and compliance is no doubt equally reassuring for owners and investors.
Many of the changes refer to the design and construction with additional safety features, such as second stairwells, potentially adding to the cost and time taken to develop.
For investors, it’s also important to note the changes to duty-holder roles.
To BTR or not to BTR?
“During the operational phase, the legislation places obligations on building owners and similar head leaseholders. These are significant, but again can be delegated to suitably qualified consultants and professionals,” says Barnard.
Development challenges aside, the current political focus on housebuilding is very likely to be good news for the UK BTR sector.
If the Labour Party takes power in the upcoming general election, it has pledged to build 1.5 million new homes in the first five years, including many homes to rent. This will be supported by reforms to speed up the planning process.
The number of new homes pledged is a testament to the dire need for more housing in the UK, which supports a good potential investment opportunity for BTR, particularly as the market matures and the secondary market develops.
Our previous articles in this series:
