Much like many other sectors and industries, the buy to rent (BTR) sector is feeling the effects of current global macro events. From the post-Covid strain on the economy to post-Brexit regulatory and social changes, high interest rates due to the cost of living crisis, continued supply chain issues, and more, there have been significant challenges to the market and these will likely continue for some time.
In today’s article, we will take a close look at the current state of the BTR sector in the UK and look forward to some predictions for the future.
BTR In a New Economic World
Despite the headwinds, the BTR sector has experienced double-digit rental growth over the past 12 months. BTR is up 12% in terms of rental growth compared to the private rental landlord market, which itself is up approximately 5% year over year.
The industry has seen exponential growth over the last 10 years, particularly in the last few years thanks to the relative affordability of capital. However, with the above-mentioned macro factors at play and a general election ahead of us, investor sentiment is becoming more cautious. This will likely cause a slowdown of both investment levels and, in turn, the level of BTR development.
Premium amenities are one of the biggest contributors to BTR’s growth, with gyms and co-share working being the two most important amenities for residents. Some dedicated BTR operators are now branching out into purpose-built student accommodation (PBSA) and co-living, and vice versa.
There have been some evolving trends resulting from the cost-of-living crisis. For example, cohabitation is increasing, more couples are opting to rent one-bedroom properties as opposed to two-bedroom, and longer tenures in rented housing are becoming the norm.
There is greater pressure on cities than ever before, with more young people moving to urban centres and therefore requiring housing in those locales. Leading cities for BTR based on current stock and development pipeline include Birmingham, Manchester, Leeds, and Glasgow. London lags behind due to a relative lack of viable locations.
BTR and the UK's Political Climate
Experts currently predict that the Labour Party will win the next election. Recently, this party has made several housing policy announcements in an attempt to put housing delivery front and centre in its general election campaign. There are also expected to be other policy announcements around rent caps being extended, much like the policies that have recently been enacted in Scotland.
In 2019, the UK Government had set a target of 300,000 news homes. However, the closest it has come to delivering on this target was 220,000 homes in a single year. It is estimated that there is a shortfall of 2.3 million homes in the UK presently, further fuelling the demand for BTR.
Successive governments have failed to build enough homes and the Centre for Cities has said that the current case-by-case planning process based on the 1947 Town and Country Planning Act has created an inefficient and outdated planning system, hampering housebuilding. The Centre for Cities has calculated that at least 4.3 million homes could have been built since the 1950s if planning laws had been different.
Compared to some European countries, operators who have a pan-European portfolio feel that the UK government regulations have created restrictive hurdles compared to some of its European neighbours. BTR represents 1% of the UK’s total housing stock and less than 5% of the total rental sector, with private rental landlords making up the majority. In Germany, by contrast, BTR makes up 40%.
Roadmap to Delivering Sustainable BTR
Looking into the future, it is vital that BTR investors and developers approach the changes in the market with resilience and sustainability in mind. These factors are expected to be some of the most crucial to the success of BTR in the next few years.
Building with good sustainability credentials will achieve greater renter interest and rental yields, as consumers become more and more concerned with their own and organisations’ impact upon the planet.
Aside from the operational efficiency of buildings, investors are now focusing on the embodied carbon in the materials used. This is expected to be the next big sustainability frontier for the industry to tackle.
There is a much greater level of education required in the industry about what can be done to improve the operational efficiency of BTR assets and, ultimately, the industry's impact on the environment.
Investment: Financing BTR Deals and Developments
Inflation and interest rates are currently hampering investment into the BTR sector. Investors are currently holding back to see how returns will look over the next 6-12 months.
Many experts expect inflation and interest rates to rise still further. Rates were thought to have peaked, but the Bank of England's base rate is now expected to reach 5.5% by November and remain elevated until February 2024. This will likely result in more people opting to rent as opposed to buying as property affordability becomes further impacted. Therefore, this will drive demand for BTR even further. Operators are experiencing a higher rate of renewals, resulting from the affordability issues around buying property.
Debt financing and cost of capital are also going to be issues over the next 18 months. However, lending is increasingly being facilitated by debt funds as opposed to traditional lenders.
With the strong performance track record of the sector, the slowdown in investment is only expected to be temporary.
Profits are being squeezed now, particularly as the cost of building is continuing to increase. With developments costing more, ultimately the value of the asset is less and therefore yields are widening. However, BTR yields remain strong in comparison to other property sectors. BTR also offers relatively low operational costs in comparison to other sectors. Demonstrating costs saving, particularly through the operational efficiency of an asset, will be a key criterion for lenders moving forward.
Environmental, social, and governance (ESG) factors continue to be a major focus for investors. However, there are calls from all areas of the industry to engage the government and gain its support around sustainability. In this area, the UK lags behind many of its European counterparts. Denmark's government, for example, invests more into sustainability than any other European government. The industry is also calling for the government to promote and support innovation within the industry, particularly around more modern construction methods.
Planning is a huge bottleneck for the industry and continues to be a reason for concern when financing a new development. This, coupled with the new Building Safety Act measures and the larger macro trends, will put a further burden on the growth of the BTR sector.
Much of the investment in the UK BTR sector to date has been from overseas, particularly the US. However, more local investors are now taking interest in the market.
Changes to Consumer Demands
There is a growing desire amongst younger demographics for mobility and flexibility, meaning that BTR has a huge appeal to this section of the population. Generation Z continues to become accustomed to PBSA, the amenities and the more modern way of living it provides, with 45% of university students using PBSA in the UK.
Co-living represents another huge opportunity, particularly in light of the cost-of-living crisis and the resulting changes to consumer habits.
The Growth of Single-Family Rental
The average age of a first-time buyer in the UK is currently 39 years. However, due to the macro trends already outlined, that age is expected to increase.
Investor demand and occupier demand are both increasing significantly in the area of single-family rentals (SFR), with around 24,000 single-family units in planning or construction at the time of writing. Those in single family rental units typically have a longer tenure than those in apartments.
Due to the various macro-economic factors at play, the demographics of those occupying SFR units is changing. The median age has increased to 40 years old. There are approximately 5 million single family renters in the UK. However, this figure could be significantly higher if the stock was there to service the demand.
Tech-Enabled Customer Service
Anne Kavanagh, CEO of Telford Homes, says that tech presents a huge opportunity for the real estate industry to progress and to counteract some of the current headwinds. The industry has historically been slow to adopt technology and therefore slow to enjoy its positive impact on general efficiencies.
Kavanagh believes that AI presents an opportunity to crunch data quickly, particularly in the capacity of the planning process.
There is also a greater focus around data mining to understand customer habits, identify trends, and make smarter business decisions as a result. In the near future, we can expect to see a significant increase in the adoption of AI for the purposes of customer relations.
If you would like to learn more about the ways that AI can be utilised in your organisation, or anything else we have discussed in this post, please contact us and a member of our team will be pleased to advise you.