In the space of just a few years, the UK build-to-rent (BTR) sector has come into its own. While not a new phenomenon globally, it has cemented its position in the UK as a distinct asset class, evolving away from the pre-existing private-rented sector.
Triggered by the introduction of buy-to-let mortgages in the 1990s, owning rental property has been a popular investment for small businesses and individuals for decades. However, a lack of investable assets at scale, the absence of investment vehicles with a robust track record, and the intensity of day-to-day management tasks have historically held back institutional investment.
Why the institutional approach?
Today's landscape for rental investment has significantly changed. Demand has continued to increase, with 1.7 million more rental households in 2017 compared to 2007, according to the ONS. This means that rental homes need to be built at scale, something that smaller landlords cannot do meaningfully. Tax and regulatory changes have also started to bear down on amateur landlords, leaving a gap in the market that has been seized upon by long-term institutional investors.
This has come in the form of purpose-built BTR: a distinct investment type, with different physical and operational characteristics compared to converted stock. Large, multi-unit blocks offer the scale to attract large investments, which ensures schemes are built to meet tenant needs and designed to the most operationally efficient specification possible.
Economies of scale reduce overall running costs while increasing net income flows. This allows operators to provide a variety of facilities and amenities, such as free WiFi, private cinema, gyms, a 24-7 handyman service and resident lounges, giving residents access to lifestyle services that home ownership and rental of converted stock cannot. Operators also retain tenants by offering a customer-focused service and running developments in a way that encourages tenants to build networks and establish roots, for example offering social clubs or having a communal roof terrace. This institutional approach means that the UK's rental sector is being professionalised, setting new industry standards in management.
As the sector has matured, it has attracted alternative sources of capital into the residential market. Unlike traditional house building, typically adopting a short-term investment approach, BTR focuses on long-term income streams. This has made it attractive to pension funds, helping to meet long-term liabilities, while providing a hedge against inflation. Greystar, for example, is planning to raise capital from major pension funds and insurers for its BTR fund, and will leverage Greystar’s vertically integrated platform to establish a best-in-class portfolio focused on London.
Why BTR schemes?
The investment rationale for purpose-built BTR is a strong one: investments are underpinned by stable occupancy rates, producing consistent cash flows; rental growth continues to outstrip inflation; and needs-based demand is decoupled from economic volatility.
Building large schemes has a number of advantages. Sites can be cherry-picked in areas of potential high growth and demand, maximising returns, while providing homes in areas that need it. Legal & General, for example, has focused on key regeneration areas, such as Salford, that have been transformed with improved services and infrastructure, attracting new residents.
Purpose-built BTR can also be delivered much faster than other forms of housing. Compared with 'For Sale' developments, investor capital can be deployed and start generating returns much more rapidly.
Addressing the supply-demand imbalance
The speed of delivery for purpose-built BTR means that the sector has received wide Government support as a means of tackling the UK's housing crisis. In terms of new and upcoming construction starts, purpose-built BTR has 110,000 homes currently in the pipeline, according to the British Property Federation and Savills. The sector will inevitably make a powerful contribution towards delivering the 300,000 new homes needed each year in the UK. This should have knock-on effects on both rental and ‘For Sale’ home affordability, beginning to address the current supply-demand imbalance.
The continued structural shift towards renting-only further reinforces demand for purpose-built BTR. Long-term, transparent leases will continue to attract residents looking for flexibility and security, as well as those looking for a more lifestyle-led proposition. In a time of economic uncertainty, diversification benefits from more cyclical investments also continue to attract capital from an increasing number of alternative sources, meaning the future looks bright for purpose-built BTR.