What is Build to Rent and Is It Worth It?
.Build-to-rent is a relatively recent phenomenon in the UK property market. Offering steady rental income and capital gains appreciation, many larger institutional investors are putting money into the sector.
At the same time, trends in the UK housing market are boosting the appeal of new builds to rent. Rising rental costs, a shift in tenant priorities due to the pandemic and pressure to meet the demand for housing means that build to rent is becoming an important part of the UK property market.
In this article, we take a closer look into the question: What is build to rent and is it worth it?
What is Build to Rent?
Build to rent refers to properties designed and developed with the intention of appealing to the rental market and tenants rather than homeowners.
Itwas introduced in 2012 and used as part of the legacy programme for the London Olympic Games. Athlete’s accommodation in Stratford’s East Village became a private rental and, since then, other large developments have come to fruition.
Designed to appeal to renters, build-to-rent is a way for developers and investors to provide high-quality purpose-built accommodation. Build-to-rent developments are designed with the local property market in mind, feature on-site facilities like gyms and bike storage and enhanced security and sense of community.
How Big is the UK’s Build to Rent sector?
Backed by the Government’s Home Building fund, many large developments have followed the Olympics legacy and the last decade has seen a steady and rapid rise in build to rent. In 2021, around £4 billion was invested in the build to rent sector and pipeline projects in the sector account for 212,000 homes across the nation.
However, there is still a shortfall between new stock entering the market and demand for rental homes, with 227,000 rental homes required per year for Britain’s rental market to meet demand. Knight Frank predicts that 6.75 million households will be living in rented accommodation by the end of the decade.
Does Build-to-Rent Make a Good Investment?
When considering whether a build to rent investment is a good one, it’s important to take a look at the UK rental market trends.
Renting is on the rise, and in 2021, the average annual rental growth rate in the UK grew by 8.3%. Lack of stock and rising demand is pushing rents upward, creating opportunities for build to rent developers and investors.
The gap between supply and demand for rental accommodation is only widening. Almost 230,000 new rental homes will be required per year over the next decade to avoid a shortfall caused by the expected creation of 1.8 million new households.
Lack of Rental Stock
Despite demand, there is actually a decrease in the number of properties to rent in the UK available within the buy-to-let sector. With sky-high property prices, many landlords have sold up and exited the market, offloading rental property assets to maximise equity gains in the current market conditions.
The Covid-19 pandemic caused huge shifts in the housing market. It increased the number of short-term lets and the popularity of staycations. 76% of councils have seen an increase in property investors converting buy-to-let into Airbnb lets, intensifying the supply issues of rental stock.
North East is the Most Profitable
The UK’s North East has seen the most significant decline in rental stock. The number of available properties is 50% lower than the 2017-2019 average. Property investors looking for build to rent opportunities in the North East are likely to achieve some of the best capital gains. Especially with house values expected to increase 18% through to 2025.
What are the benefits of Build-to-Rent?
Renting a new build comes with many benefits for tenants, including:
- Lifestyle appeal
Because build to rent is purposefully built with renters in mind, tenants enjoy access to on-site facilities and management teams. Build to rent developments offer a more streamlined experience, greater sense of community and improved security.
- Flexible and Quality Design
Build to Rent design tends to cater to a broader demographic. Such as young families and young professionals. The design tends to be catered to their needs for greater comfort and convenience. Build to rent properties also tend to come with high-end fixtures and furnishings.
- Inclusions and Convenience
Many build to rent properties come with some bills included. Generally, the sector has helped to increase the quality of rental property stock. The location is also attractive. As it opens up city centre housing options for those that would usually not be able to buy in the area.
- Diverse Demographics
BTR used to be seen as homes for a younger demographic. Like students or young professionals in the early stages of their careers. However, with record housing prices across the UK and lack of supply, the build to rent sector is now designed to cater to a broader demographic in different stages of life.
Build to rent also presents many benefits for investors, including:
- Long-term Investment
For developers and prospective investors, build rent offers the possibility of higher rents. This is due to the facilities and convenience they offer to tenants. At the same time the steadily increasing asset value hits the mark for a high-quality investment.
- Success Across the UK
While new rental developments in London have long been a focus, build to rent has found success in urban areas across the UK. Especially where land values are competitive. Investors are branching out of London into growing cities like Leeds, Manchester and Birmingham.
- Speed to Market
Rental housing has faster delivery thanks to its module construction. At the same time, rental developments do not encounter the same risks in regards to market saturation as normal housing.
How Do I Invest in BTR?
Most build to rent schemes are developed with long-term renters in mind and usually under the ownership of property firms or investment companies. This means there aren’t usually too many of these types of properties on the market.
Build to let mortgages are usually offered to investors that are developing their own build to rent properties. To meet the criteria of these mortgages you will need to have the short-term capital required to get the development off the ground to purchase the initial site and building costs.
For buyers considering an off-plan property in the build to let sector, it’s important to invest in a project developed by a reputable developer with a solid track record. Read more about new builds to rent and this type of investment in our complete guide to off plan property investment.
What is the Difference Between BTR and PRS?
Private Rented Sector (PRS) property is a classification of housing in the UK. Landlords are the owners who then rent out to tenants. Any privately owned property that a landlord rents out falls under private rental housing. Build to rent sits within this classification.
However, individual landlords with a few properties usually own PRS. Whereas, institutional investors and property companies tend to own build to rent. The schemes are professionally managed and appeal to residents because of their higher quality and security.
Why is Build to Rent a Good Investment?
Build to rent is a good investment for a few key reasons:
- Longer tenancies: Generally tenancies in build-to-rent developments last for around 3 years or more.
- High tenant demand: Due to their location and the appeal of the property features and services, build-to-rent properties tend to be appealing to a broad range of tenants, boosting their value.
- ROI for investors: With reliable rental income and highly likely capital gains growth, build to rent comes with long-term investment reward. Securing an investment for build to rent can be more challenging for developers. However, there is a large market out there for those that have the appetite.
- Popularity: More and more residents are looking for community and wellness within the places they live. Build to rent includes spaces that encourage interactivity and engagement.
What are the Risks with Build-to-Rent Properties?
No investment is completely free from risk. Here are a few of the things that can go wrong with a build to rent UK investment:
- Construction risks, such as taking longer than planned or encountering problems which leads to greater financial costs.
- Because the sector is new, occasionally developers encounter planning permission issues meaning growing costs and reduction in rental income.
- All landlords can experience void periods. But there could be delays in getting the full rent until the property fills up.
Build to rent is a rapidly growing sector of the UK housing market. With rents at record rates and more people looking to rent a new build property, the returns for investors can be lucrative. At the same time, tenants are looking for the high-quality, convenience and sense of community that build-to-rent offers. To find out more about investment opportunities, get in touch with our property experts.