Investment Opportunities in Build to Rent: What to Expect in Q4

What is build to rent?

Properties that are especially designed to be rented rather than sold are referred to as “build to rent” (BTR) properties. The majority of the time, this idea is connected to residential properties—like houses and apartments—that are constructed with long-term leasing in mind.

Though residential real estate is the primary focus, this concept has recently been used more and more for commercial spaces as well. Building commercial space for long-term rental purposes can also be considered build-to-rent in this context, particularly in cities where there is a high demand for adaptable commercial space.

There are two approaches: to provide a tenancy experience as well as ensure the location and neighborhood are prosperous and integrated, which means that build-to-rent not only builds houses but communities as well.

1. Good-quality properties with longer-term tenancies and stable rents that cater to a broad or specific population. They are mostly found in bigger towns and cities, frequently located close to convenient access points for public transport.
2. Social activities and communal spaces: residents usually get access to a wide range of communal spaces, including gyms, roof patios, resident lounges, and guest rooms that can be rented.
3. Integrated property management. Most developments will have staff on-site, and they will be operating 24/7 to provide security and support.
4. Other beneficial services such as superfast broadband, friendly concierges, bike parking, storage lockers, and extra services like vehicle rental, dry cleaning, and child care are just a few of the amenities that many are providing.

What is the potential for build-to-rent in the UK?

The UK’s build-to-rent (BTR) industry presents considerable opportunities owing to diverse market dynamics and socio-economic considerations. Here are some salient features emphasising its potential:

1. Growing demand for rental properties: The UK is experiencing an increase in demand for rental houses due to various causes such as rising property costs, evolving lifestyle preferences, and growing urbanisation. 
2. Government support: The BTR sector has received support from the UK government through a number of programs and policies designed to increase the supply of housing. To promote investment in the industry, financial incentives and planning reforms have been implemented.
3. Urbanization: The need for quality rental housing in urban regions is rising as more individuals relocate there in search of better work prospects and lifestyle advantages. BTR developments frequently provide contemporary, strategically placed, and expertly managed rental units to meet this need.
4. Professional management and amenities: Modern renters are drawn to BTR buildings because they are usually professionally managed and include a variety of amenities like co-working spaces, gyms, and community areas. Renters find this degree of convenience and service to be very appealing, and it also contributes to high occupancy rates.
5. Long-term rental trends: Long-term renting is becoming more and more common; more people are choosing to rent for longer periods of time instead of buying a property. 

In the UK, the government has announced an overhaul of the planning system to fix the foundations and grow the economy. In order to address the worst housing crisis in recent memory, all boroughs in England will be assigned new, mandatory building objectives that will allow for the construction of an additional 1.5 million houses.

According to the National Planning Policy Framework, affordable private rent—a type of affordable housing especially created for build-to-rent projects—should be made available by default as affordable housing on build-to-rent schemes. Within a development, units with private market rent and affordable private rent should be jointly managed by a single build-to-rent landlord.

Market trends and predictions for Q4

The UK’s build-to-rent market is expected to grow significantly in the next few years due to increased investments and innovations. The acute housing crisis and the changing preferences of younger generations—who choose flexible rental arrangements over homeownership—are the main drivers of this growing interest. This growth is consistent with patterns seen in other European nations and is a response to the varying availability of housing and rising demand for superior rental apartments.

In the UK outside of London, average advertised rents finished 2023 10% higher than the previous year, while in the capital, they increased by 6%. We forecast a slowdown in the rate of increase in advertised rentals by the end of 2024, with increases expected to be 5% outside of London and 3% inside.

4 key market trends for investment in BTR developments

Trend #1: Rising interest rates & cost of homeownership

The BTR industry is expanding as a result of increased mortgage costs and interest rates. One of the main causes of rising monthly homeowner payments and a decline in the market for for-sale housing as more potential buyers choose to rent is higher mortgage rates.

Because more and more people are choosing to rent instead of buy a home, we think BTR might be a desirable housing option.

Trend #2: Capital flows into BTR

The inflow of capital into build to rent products is rising sharply as more and more institutions include BTR into their investing strategies.

There isn’t enough fresh BTR development available to match this demand, though, so there’s a chance that dry powder may continue to be needed for departures in the future.

Trend #3: Work from home

Another change in the population that we think is having an impact on the BTR industry is the increase in remote work, which has been fuelled by the COVID-19 outbreak.

The number of individuals working from home is increasing, which is driving up demand for rental homes with extra space and configuration to support home offices. In response to this trend, a few BTR properties have included workable, flexible areas.

Trend #4: Shifting demographics

Millennials, a significant demographic component in the UK today, are one of the main demographic groups driving the demand for BTR homes.

Due to ease and flexibility, Millennials, who came of age in a post-recession period characterised by financial instability, are opting to rent rather than own homes. BTR properties may immediately appeal to this group due to their tenant-centric designs and contemporary facilities.

Why are investors interested in build-to-rent?

1. Stable and predictable income: Comparing rental income to other investing possibilities like stock trading, it can be far more steady and predictable. Even in recessions, rents usually result in revenue generation, regardless of market swings. This is due to the fact that a lot of rentals—including single-family homes—give occupants a homely sense that entices them to remain longer. 
2. Long-term appreciation: build-to-rent properties aim to maximize rental income, but they also have the potential to appreciate in value over time. This implies that investors have the option to sell at a profit in the future. The combination of long-term appreciation and steady monthly income potential provides investors with the highest level of financial stability. 
3. High demand for rental housing: In the UK, there has been a sharp increase in the demand for rental property in recent years due to factors like rising property prices, shifting lifestyle preferences, and growing urbanisation. Younger generations are more affected by this tendency, as they frequently value affordability and flexibility over homeownership. Because of this, the rental market is expanding significantly, and in order to keep up with the rising demand, developers and investors are concentrating more and more on build-to-rent projects.
4. Professional management: build-to-rent managers usually have years of expertise managing multifamily properties. This implies that instead of having to actively manage their properties, investors can generate passive income by leaving their assets in the capable hands of seasoned professionals.  
5. Scale and efficiency: Build-to-rent projects provide streamlined procedures and cost efficiency, which lowers the cost per unit because they are frequently large-scale projects. In addition, they encourage the effective use of resources and service optimisation, which maintains resident satisfaction while also improving the performance of the property. They are therefore very profitable and long-lasting. 

The best cities for build-to-rent in the UK

The best cities for build-to-rent in the UK are typically those with strong economic growth, high rental demand, and ongoing urban regeneration projects. Here are some of the top cities for BTR developments:

1. London

• Reasons: largest market in the UK for rentals, high demand from students, foreign residents, and young professionals, robust work economy with a concentration on the creative, technological, and financial sectors; and a vast network of public transport.

Here, you can find our latest properties in London.

2. Manchester

• Reasons: strong urban renewal and quick economic growth, a sizable student body and an increasing proportion of alumni opting to remain in the area, strong amenities and cultural scene, growing employment prospects, especially in the fields of professional services, technology, and media.

Here, you can find our latest properties in Manchester.

3. Birmingham

• Reasons: significant expenditures in infrastructure, such as the high-speed rail HS2, a populace that is both youthful and diversified, a dynamic job market with expansion in industries including manufacturing, technology, and finance, and major initiatives for urban redevelopment.

Here, you can find our latest properties in Birmingham.

4. Leeds

• Reasons: thriving industries in law and finance, large enrolment of students., ongoing initiatives for urban renewal and growth, and good amenities and transport connections.

Here, you can find our latest properties in Leeds.

5. Bristol

• Reasons: a strong cultural scene and excellent standard of living, strong demand from families and young professionals, thriving fields in the creative and technological industries, and restrictions on home supply are driving up rental demand.

Here, you can find our latest properties in Bristol.

6. Liverpool

• Reasons: large-scale economic growth and revitalisation initiatives, large enrolment of students, an increasing proportion of youthful professionals, expenditures for public transit and infrastructure.

Here, you can find our latest properties in Liverpool.

7. Nottingham

• Reasons: growing number of students and a youthful labor force, large-scale infrastructure and urban renewal investment, strong demand for rental homes, diversified economy with strong points in healthcare, education, and transportation.

Here, you can find our latest properties in Nottingham.

8. Sheffield

• Reasons: high demand among recent graduates and young professionals, initiatives for urban renewal and economic progress, diversified economy with industries including technology and advanced manufacturing, good amenities; and transport connections.

Here, you can find our latest properties in Sheffield.

What are the potential risks?

In real estate, as in any other business, there are some risks. But you can also protect your investment from that if you are aware of:

1. Development risks: BTR projects frequently require a sizable initial investment for development. Cost overruns, delays in building, or problems obtaining planning clearances might result in higher costs and delayed revenue collection.
2. Market fluctuations: The real estate market is prone to fluctuations, as shifts in the economy impact both the demand and value of properties. A recession may result in a decline in the demand for rentals and a drop in property values, which would impact returns on investment.
3. Regulatory changes: The BTR industry may be impacted by modifications to tax laws, regulations, or government policies. For instance, higher property taxes or new rent control laws may have a negative impact on profitability and the feasibility of BTR investments.
4. Interest rate increases: The cost of borrowing may increase due to rising interest rates, making financing BTR projects more costly. The affordability of renting can also be impacted by higher interest rates, which may decrease demand from tenants.
5. Competition: Developers and investors are facing more competition as the BTR industry gains prominence. In some cases, this might result in market saturation, which makes it difficult to attain high occupancy rates and robust rental yields.
6. Economic and demographic shifts: The demand for rental homes may fluctuate in response to changes in the local economy and population. A decrease in economic prospects in the area or a change in population dynamics, for example, may narrow the pool of possible tenants.
7. Liquidity risk: Compared to other asset classes, real estate investments—including BTR properties—generally have lower liquidity. It may take some time to sell a home, and in a bear market, investors may have to accept lower prices, which will reduce their overall earnings.

Summary

In Q4, the UK’s build-to-rent (BTR) market is expected to increase significantly because to increasing rental demand, support from the government, and continued urbanisation. An increasing number of people, particularly young professionals, are choosing to rent rather than own due to high housing prices and lifestyle preferences. 

Long-term tenants are drawn to BTR buildings, which are mostly found in big cities like London, Manchester, and Birmingham. These complexes provide high-quality, professionally managed rental apartments with amenities like gyms, co-working spaces, and communal areas. Investor confidence is also bolstered by the government’s support through financial incentives and planning improvements.

The industry is anticipated to grow quickly as more institutional investors join the market, satisfying the strong demand for rental homes. This increase is in line with patterns observed in other European nations and reflects a general trend towards rental housing.

To find out more about investing in build-to-rent  in the UK, get in touch with Aspen Wolfs experts.

FAQ

1. What is the build-to-rent fund in the UK? A completely recoverable business investment is the Build to Rent Fund. The investment makes it possible for the government to finance or share risk, allowing programs to be implemented.
2. Is build to rent a good investment? The opportunity to earn larger rental yields is one of the many important advantages of purchasing build-to-rent real estate. These newer homes can rent for more money than their older counterparts because of their enticing features, high-quality finishes, and contemporary designs.
3. What are the benefits of build-to-rent for developers and investors? The main benefits are: long term investment, opportunity in urban and suburban areas, speed market, and technology. 
4. What are the benefits of build to rent for residents? For residents, the benefits are: community-focused design and its amenities; gyms, restaurants, green spaces, workspaces, and communal roof terraces, higher quality, flexible design, beyond the younger demographic.
5. Can build-to-rent properties be bought and sold in the future? All homes must be rented for a minimum period of time, usually 15 years, in order to maintain their construction-to rent status.