Build to Rent 2022: regulation, inflation and SFH

Colliers examine trends and challenges facing Build to Rent in 2022 - changing regulation and an aggressive inflationary economic environment.

Development site following another year of record transaction volumes in the UK Build to Rent sector - Colliers | BTR News

Following another year of record transaction volumes in the UK Build to Rent sector, Mike Butler, senior surveyor in Colliers Residential Build to Rent team examines the trends and challenges facing the market in 2022, as developers and investors grapple with the ending of Covid-19 restrictions, changing government regulation, and an aggressive inflationary economic environment.

By Mike Butler, Senior Surveyor, Residential – Build to Rent, Colliers

Changing regulation challenges for developers

While the Build to Rent sector will be exempt from paying the developer’s tax, the levy created by the Department of Levelling Up to raise funds for remediating cladding issues, the Building Safety Act 2022 is due imminently and is likely to impact the mandatory design of buildings from a fire safety perspective. 

While we can make accurate predictions about what this will entail, an ever-changing regulatory environment burdens developers through the construction period with new layers of risk, with designs potentially becoming non-compliant if regulation changes.

This becomes significant in a sector still heavily predicated on forward purchase deals (circa 75% of deals in 2021), and it creates a difficult question as to where retrospective risk lies. 

On the one hand, why should investors pre-pay for a building that once complete is non-compliant with new regulations? But on the other, how can developers starting on construction now be expected to pre-empt future legislation? Investors and developers will likely need to work collaboratively to share and mitigate these risks if Build to Rent transaction volumes are to remain on their upward trajectory.

Of equal interest will be the government’s Social Housing Regulation bill, which is set to be fast-tracked to a March release, as well as new regulations which will demand that newly built homes produce around 30% less carbon, which is set to come into effect in June this year.

The inflationary environment

Inflation is at its highest rate for 30 years having risen to 5.4% in the 12 months to December. While most of this can be attributed to soaring energy costs, it is also a product of supply chain pressures which in turn is putting upward pressure on build costs.  

While there is a consensus that inflation may soon level off, there are still profound short term impacts which are putting significant pressure on developers’ ability to agree fixed price contracts. 

UK Construction Materials Inflation. Source - BEIS - Colliers | BTR News

Speaking with Colliers’ Cost Consultancy team, it seems the worst may have passed, and tender price forecasts could begin to soften, although there won’t be a true levelling off until 2023. 

Material prices are expected to stabilise once supply and demand equalise, with the key variable being whether a skilled labour shortage proves to be temporary. 

Construction Products Annual Price Inflation, November 2021. Source - BEIS - Colliers | BTR News

For 2022, there could be a lag between the easing of input cost pressures feeding through to reduced tender price inflation as contractors look to recover the margins that have been hit hard over 2021. Supply chains have suffered significant stress over the last year, and there could be more insolvencies in 2022 than in 2021. 

Away from build costs, interest rates are likely to rise this year to ward off inflation. Any rises in 2022, however, shouldn’t be large enough to warrant an immediate or impactful demand in the for-sale market. 

Single Family Housing (SFH)

The second half of 2021 was conspicuous for the ongoing announcements of new capital entering the SFH sector. The joint ventures of Gatehouse and TPG (announced August), Aviva and Packaged Living (November), Moda and Ares (November) and Blackstone and Regis’ launch of Leaf Living (November) amounts to in excess of £3bn of new capital targeting the sector. Couple this with the earlier moves of L&G, Goldman Sachs and Pitmore, and Apache’s Present Made, as well as others, and it’s clear that the family homes to rent investment class has proven itself. More investors will inevitably appear in 2022. 

While buoyant, the single family sector currently has its challenges, not least the unfavourable market conditions which currently favour developers and housebuilders over investors. 

At present, supply of available housing on the market, particularly in the south, is incredibly low. It’s no surprise there has been such runaway growth in the sales market over the last year as a result of this, with the Halifax (9.8%) and Nationwide (10.4%) indexes reporting aggressive house price growth for 2021.  

The great supply crunch - available houses are at record low. Image credit - FT - Colliers | BTR News
Image credit: FT.

With a red-hot sales market, developers and housebuilders, who continue to dominate suburban markets and control significant amounts of pipeline stock, remain less inclined to seek bulk exits to Build to Rent investors, especially if investors are expecting discounts.  

This could frustrate the sector’s growth in 2022, but with house price growth expected to slow (Colliers predicts an average of 3.5% growth over the next five years), Help to Buy (potentially) ending in 2023, and further interest rates rise (making mortgages more expensive), developers should find themselves more willing to sell. 

Until then, we can expect single family net initial yields to compress as the weight of capital competes against itself to win limited prime product, especially in the south east.