The build-to-rent (BTR) market has been a hot topic in the UK for several years now. With the aim of addressing the housing crisis, this model provides high-quality and accessible accommodation to renters.
However, the growth of this sector has slowed down recently. According to a study commissioned by BusinessLDN and the British Property Federation (BPF), the pace of growth has decreased from an average of 28% year-on-year to only 9%. London has been hit particularly hard as developers face a number of unique challenges – such as a shortage of sites, the cost of land, and a squeezed energy grid, with growth slowing even more than other regions. The number of BTR homes completed, under construction or planned in London increased by only 6% compared to 12% in other regions.
What’s caused this?
In truth there are a number of factors contributing to an under-delivery of new homes; decreased grant funding, increased interest rates, build cost inflation, issues concerning building safety and labour shortages.
But there are two factors that may have played a more significant role than the others; gaining planning approval and cost of debt. Challenges with the UK planning system, including changes to government policy and resourcing at the local authority level can make securing permission protracted and coupled the cost of debt, which increased substantially last year, making it more expensive than the income it could cover in many cases. To cover the increased debt cost, asset prices were pushed down, while investors using core capital or all-in equity increased. Due to the lower returns and the difficulty of accelerating returns, fewer private equity firms are entering the space.
The future still looks bright
But it’s certainly not all doom and gloom for BTR and there is light at the end of the tunnel with construction costs returning to pre-pandemic levels and more debt will likely come back into the market in Q4. On the equity side, a lot of capital has been raised but not spent yet and once land and asset prices align with current market conditions, transactional activity should pick up.
Overall BTR, PBSA and seniors housing are still experiencing unprecedented levels of investor interest and Guy Whittaker – an associate at Savills – is positive about them as he believes that although there is a decreasing pace of growth, the pipeline is at an “all-time high.”
The geographical reach of BTR has also continued to grow: a quarter of local authorities currently have homes under construction, compared to 10% in 2017. This has been supported by the emergence of Single-Family Housing (SFH) which enjoyed a record quarter in Q1 2023, with nearly £500m invested.”
It makes sense to invest in assets that benefit from changing lifestyles and have strong counter-cyclical features and inflation-matching characteristics. A recent survey of the European investment community found that by 2025, half of all investors – up from 37% today – expect over 25% of their assets under management to be allocated to BTR and the ‘living’ sector. And many believe that within a decade these living sectors could become one of the world’s largest investable asset classes.
Why BTR will retain an advantage over residential for sale
So, after four consecutive years of record-breaking investment, and given the uncertain economic climate it’s probably no surprise that the market has slowed a little, but BTR still remains one of the hottest sectors for investment. When compared with the residential sales market which will likely continue to face weaker home buyer demand and subdued activity throughout 2023 and beyond, BTR can offer an alternative exit strategy for developers looking to maintain sales rates and de-risk their pipelines. The BTR sector can therefore play a key role in maintaining construction output and support housing delivery nationwide.
We ourselves at MRG are seeing an increase in senior strategic hires as many of our clients prepare themselves for what should be a far busier H2 so it may have slowed but BTR is still the sector on everybody’s lips.
To discuss opportunities within the build-to-rent sector contact Austin Mooney.