Part 1: What does 2024 hold for investors in the UK’s BTR market?

Federated Hermes discuss what 2024 holds for investors in UK Build to Rent, sharing some trends in the first of a two-part series.

Will Gibby, Fund Director, Global Real Estate, Federated Hermes Limited | BTR News
Will Gibby, Fund Director, Global Real Estate, Federated Hermes Limited.

In 2023, we’ve seen the UK’s real estate market buffeted by macroeconomic headwinds and impacted by major structural shifts in demand, which are likely to persist into 2024 and beyond.

By Will Gibby, Fund Director, Global Real Estate, Federated Hermes Limited

Over the last 12 months, investors in the UK’s real estate markets had to adapt to weather a perfect storm of challenges that have adversely affected sentiment and accelerated shifts in occupational demand. Geopolitical tensions, rising inflation, and a swift normalisation of interest rates which increased the cost and restricted availability of capital, in addition to the tailwinds of Brexit and the pandemic, have led to a rapid repricing of real estate markets as investors urgently seek sustainable returns and consistent cashflows.

A bright spot against this gloomy macro backdrop is the Build to Rent market – which, after a decade of continued growth, continues to be the fastest growing sub-sector of the British property market, attracting investment from both local and international institutions. While investment volumes for 2023 have moderated after a record-breaking year in 2022, the total value of existing and pipeline Build to Rent developments has doubled over the past four years, from £35bn in 2019 to £71bn in 2023.

In the face of the aforementioned headwinds, yields remain relatively stable, reflecting not only a generational, demographic based demand and supply imbalance but also a higher level of transparency on cost. This is achieved through a continued marking to market of capital required to maintain the distributable cashflow, avoiding the cliff edge and forecasting undertaken when investing in other property sectors. Relative outperformance within the Build to Rent sector will be driven by affordability, through delivering stability both for customers and investors, not amenity rich product where managers can become trapped in a cycle to deliver on operational efficiency percentages that have become an unhelpful industry narrative being based to some degree on hearsay. 

So, what trends will be shaping investment in the UK Build to Rent sector in the year to come?

Investment needed to meet ever increasing rental demand

Since the end of 2022, house prices in the UK have experienced a 1.4% decrease while by comparison, in the last 12 months, UK rents have seen a 2.1% increase – the highest annual growth levels for rents ever recorded since the ONS index began in 2006.

2024 will continue to see growing demand for rental homes across all regions of the UK, underpinned by shifts in post-Covid lifestyles and economic headwinds facing consumers. It is estimated that nearly 230,000 new rental homes a year for the next decade are needed to avoid a shortfall if the current growth in demand continues.

Into 2024, while there is good evidence to suggest that interest rates may have peaked in the fourth quarter of 2023, it will take some time for the market to find it’s equilibrium level, meaning rates are expected to stay higher for longer. As such, mortgages continue to be less affordable and remain out of reach for many, particularly for first-time buyers, keeping them in the rental market for longer and exacerbating the supply/demand imbalance. We are seeing this particularly in the UK’s major cities such as London, which has seen a 15% rise in rental rates over the last year, in part as demand vastly outstrips supply.

It is clear that this urgent requirement for affordable, high quality rental housing in the UK underlines the social benefit being provided by capital, which funds the development and provision of much needed rental stock.

Election watch

As we saw post-Brexit referendum, political certainty is vital to provide institutional investors with the confidence needed to invest in major new projects in the UK, which can deliver both relevant and resilient real estate outcomes. The 2024 General Election and its outcome will be pivotal in shaping investor sentiment.

Securing long term patient capital from global investors to fund new Build to Rent developments is critically dependent upon their confidence in the UK and its political stability; last Autumn’s Budget turmoil caused damage to these investors’ confidence in the UK as an attractive destination for long term investment in real assets.

Further, clarity in planning policies and long-term priorities at both national and local levels, and support for major infrastructure schemes such as HS2, will be key to the continued creation of value for investors through development projects in the Build to Rent sector.

Stayed tuned for the second part of the series, where Federated Hermes will share their final predictions on the trends that will shape investment in the UK Build to Rent sector this year.

The views and opinions contained in this article are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell securities or related financial instruments.