Part 2: What does 2024 hold for investors in the UK’s BTR market?

Federated Hermes share their final predictions on the trends that will shape investment in the UK Build to Rent sector this year.

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

Following on from the first part of this two-part series where Federated Hermes discussed what 2024 holds for investors in UK Build to Rent, the company shares their final predictions on the trends that will shape investment in the sector this year.

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

Affordability and suitability

A theme which continued to gain traction in 2023, was the demand not just for city centre, luxury Build to Rent accommodation, but for homes available for rent at affordable prices, with the amenities residents need, in attractive locations. We have seen over the last year, that residents are seeking more affordable, mid-market rental properties that provide stability.

As costs of living rise, residents are preferring benefits and amenities which they need and enhance their day-to-day life – such as a communal residents’ areas, a gym and outdoor spaces such as courtyards and roof terraces. So rather than the home itself being ‘aspirational’, customers are looking for a stable environment derived from a community that supports people to be(come) aspirational. 

Location, location, location

In 2023, it became clear that a return to office five days a week would be unlikely, with 43% of UK office workers now adopting a hybrid work schedule, with part of the week spent working from home. This has meant that many, whose desire for more space and a departure from city centre living was catalysed by the pandemic lockdowns, are now seeking high quality, affordable rental properties on the edge of the CBDs of large cities such as Manchester, Birmingham and Leeds – or in smaller UK cities such as Brighton and Bristol.

With proximity to the office no longer the dominant factor in choosing a rental location, additional factors such as having access to natural amenity, whether it be water or parkland, and also having a sympathetic residential scale street scape which engages the renter with their home and the local cultural landscape are becoming more important for renters. Additional height and massing through focusing on CBD’s where higher, competing, land values dominate, may appear profitable in the short term, but can lead to a disconnect with renters, their homes, and the community that good branding may struggle to overcome.  

ESG

Sustainability will continue to be a huge theme in 2024, as prospective tenants and residents, especially those from Gen Z and Millennial generational cohorts, having high expectations for the environmental credentials of the properties which they rent. While some argued that the macroeconomic climate would relegate environmental considerations for renters to be a ‘nice to have’, in fact, we are seeing that cumulative societal change combined with rising energy prices are only making energy efficient and environmentally friendly properties more desirable.

Developers of – and by extension, the investors in – new Build to Rent properties are well positioned to address this consumer demand by integrating the newest eco-friendly features, designs, and sustainable construction materials into their developments. As a result, these buildings can achieve greater occupancy levels and enhanced rental yields. Over the coming years, we expect to see more pressure on developers to prioritise sustainability in Build to Rent properties to meet consumer demands and expectations.

Governance is an enduring theme for institutional investors and a holistic approach is required to actively engage in identifiable risks and the potential for forthcoming regulation. Furthermore, it is essential to maintain an ability to pivot quickly to mitigate the impact of potential regulation change, which would result in enhanced depreciation costs and the prospect of reduced liquidity. 

In 2023, the key risk to the sector was the Building Safety Act, with physical implications such as the implementation on new stock of a second means of escape, along with procedures for dealing with a new regulator and creating a Golden Thread. Most of the industry has moved quickly to implement design changes for all new developments, build regulatory approvals into construction programs and created new procedures within governance protocols to deal with the ongoing management of the Golden Thread – it’s prominence as a risk should ease during the course of 2024 as the new processes bed down and there is greater engagement with the new regulator.

Conclusion

Build to Rent has been the success story of the UK real estate market over the past decade, and while showing signs of slowing in 2023 as financing conditions became less favourable, investment in this sector is set to continue at pace in 2024. The Build to Rent market remains resilient as consumers appetite for more choice and flexibility in rental housing continues to grow.

Despite this rapid growth, Build to Rent still only represents less than 1% of the UK’s total housing stock, and under 5% of the total rental sector (compared to c.40% in European markets such as Germany). Looking ahead with the scale of the opportunity for future growth in mind, we anticipate strong capital inflows in 2024, further fuelling the sector’s expansion.

Based on current projections, we expect 2024 to be the biggest year on record for Build to Rent investment, with the UK’s Build to Rent sector poised to almost double in total value to £126bn over the next five years, as investor seek stable yields with superior risk adjusted returns as compared with other real assets. 

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.