Beyond the boom: an exciting future awaits UK SFH BTR

The UK’s single-family housing (SFH) sector has undergone a significant evolution in recent years. Shoosmiths’ Simon Dawes reflects on this.

Simon Dawes, Real Estate Legal Director and Build to Rent specialist at Shoosmiths | BTR News
Simon Dawes, Real Estate Legal Director and Build to Rent specialist at Shoosmiths.

The UK’s single-family housing (SFH) sector has undergone a significant evolution in recent years. This follows a sharp increase in interest rates and resulting tightening of lending conditions – impacting consumers and businesses. Combined with wider macroeconomic uncertainty and a precarious political landscape – culminating in the September 2022 mini-budget – and it has been a tricky period for many. This includes the UK’s highly interest rate-sensitive residential housing market.

The SFH sector has defied these challenges, however. According to data from Knight Frank, it secured a record £1.9bn in investment in 2023. This is a fivefold increase from the £388m secured in 2022, with the sector commanding more than 40% of total UK Build to Rent investment in 2023.

A key driver of these flows has been the increasing number of partnerships between housebuilders and companies specialising in Build to Rent, as evidenced by Knight Frank’s housebuilder survey, which revealed that 40% of housebuilders have either already sold or intend to sell homes to Build to Rent investors.

Shoosmiths has been at the forefront of the market’s growth, advising housebuilders, and Build to Rent operators and investors on partnership agreements.

For example, the firm has been assisting Sigma Capital on its single-family housing strategy. This includes advising on a £59.5m acquisition from Avant Homes, with Sigma purchasing 306 new homes located across Avant developments in the Northeast of England, Yorkshire and East Midlands.

The firm is also acting for Aviva Investors on its partnership with Packaged Living – a collaboration that has helped to fund the creation of almost 1,000 homes across the UK.

These partnership agreements have been critical to enabling homes to be brought forward at a time when open market sales are facing challenges. Indeed, the number of single-family homes now operational or in the pipeline has almost trebled since 2018, with total UK supply now above 26,500.

While some level of consolidation in the housing sector is expected during downturns, the growth of partnerships, particularly between housebuilders and Build to Rent specialists, should not be viewed merely as a reaction to market challenges. This collaborative model is here to stay; so is SFH.

Market forces

While the Bank of England held interest rates steady at its June meeting, investors are now pricing in a nearly 50-50 chance of a first rate cut in August. Whether inflation remains sufficiently under control and this happens is yet to be seen, but the future direction for rates is likely lower.

The ECB, Swiss National Bank, and Sweden’s Riksbank have all entered rate cutting cycles.

A similar trajectory in the UK would be welcome news for mortgage holders and corporate borrowers, while also potentially acting as a shot in the arm for the for-sale housing market and housebuilders.

There are already early indications of a slight uptick in the market. In its June update, Rightmove reported that agreed sales were up by 6% year-on-year, with demand from buyers also up 5%.

As the for-sale market continues to strengthen, bulk forward sales into the Build to Rent market may become less financially appealing to housebuilders. However, it is striking to see some commentators already asking the question: Is the SFH boom over before it began? Those viewing the market purely through a financial lens, while pitting SFH against the for-sale sector are in danger of missing the point.

Greater potential

Firstly, it is critical to establish that SFH and other Build to Rent models should not be seen as rivals to homeownership, but rather as complementary options. Both markets can succeed simultaneously.

Incorporating Build to Rent alongside for-sale and affordable housing can be an effective tool for delivering multi-tenure schemes, providing a range of residential choices and creating dynamic communities.

This is a benefit that any incoming government would be wise to recognise, especially in light of Labour’s promise to announce sites for a series of new towns within a year of taking office and to build the homes by the end of a first term. Providing a range of tenures and residential choices is crucial to ensuring that these towns cater to everyone – families, individuals, and people of all ages. 

Many in the real estate industry have been paying close attention to the discourse leading up to today’s general election, particularly regarding any mention to potential future regulation on rental values, considering the downturn in Build to Rent investment and development experienced in Scotland.

It is important to recognise the institutional and professional nature of SFH, with organisations having the scale and resources to offer a different level of service to residents that want the flexibility or experience of Build to Rent.

For housebuilders, the partnerships model remains an effective strategy to diversify income streams, mitigate development risks through forward sales, and offer a variety of housing tenures. It is no surprise, then, that many are committing to this model long-term. Take Vistry, for instance, which progressed merging its housebuilding operations with its partnerships business last year. Since then, it has completed a number of deals with Build to Rent specialists, including a significant framework agreement with Sigma Capital to deliver 5,000 new homes for Sigma’s Build to Rent brand, Simple Life Homes.

This is just one example that demonstrates the power of the partnerships model and its long-term potential to accelerate housing delivery. SFH lies at the heart of this approach. While it is natural that a stabilisation in open market sales could slow its growth, there is no doubt that SFH will continue to play an important role in the UK’s Build to Rent ecosystem and residential sector for many years to come.