In years to come where the property sector is concerned, 2021 will be viewed as the time that Build to Rent hit its stride. Indeed, by year-end, it was generally acknowledged as the property industry’s ‘fastest-growing sector’.
By Paul Belfield, Director, Rund
Throughout 2021, Build to Rent attracted significant capital, dominating much of the conversation around the future of this leading asset class. Everyone wanted a piece of Build to Rent, but what was successful last year, and what can we expect in the coming years?
Challenges for the early entrants
Although Build to Rent experienced its biggest surge of growth due to circumstances born out of the pandemic, the sector is still relatively in its infancy meaning much more progress is expected to follow. However, the rapid advance is making it challenging for lenders to confidently predict how the sector will perform and how it should measure success in comparison to other real estate asset classes. Whilst there are case studies which shows Build to Rent’s long term triumph in the US market, the UK is limited in its availability of data and evidence at scale around the operating and management costs of Build to Rent investment portfolios.
Nonetheless, developers have long realised the importance of design and location; by leveraging these proven attributes, they determine they can attract the long-term interest of renters. Ultimately, the success of any investment will rely on the appeal of a scheme, not only to please customers and local communities, but also as an income generator. To secure enduring appeal, emphasis has been put on premium materials and memorable amenities in Build to Rent developments, which add value and make living in these schemes attractive, beyond just the four walls of an apartment. This became increasingly significant as the pandemic forced us all to rethink how we live, work and socialise, reflecting changes in what people were considering a priority when it came to choosing their home.
Impact of the pandemic
Collectively, Build to Rent properties offer a combination of common attractions. They are often modern, fair-sized apartments, generally built with a higher quality spec, have an emphasis on fostering communities with ample recreational and leisure facilities and include significant public realm for fresh air and offer up-to-date technology features.
As a result, the appeal of such properties, and the security and stability they offered was enhanced during the pandemic. Through the multiple lockdowns, and the subsequent need for social distancing, lifestyles and behaviours were changing, as reflected by more employees working from home and research revealing a greater interest in using local, independent shops. These aspects emphasised a desire for stronger community ties and increased local sentiment, putting emphasis on hyper-local communities and the infamous 15-minute neighbourhoods.
The global pandemic, which continues to occupy hearts and minds, coincided to a certain extent in the property world with a far greater awareness and interest in Build to Rent as a noteworthy component of the real estate sector, and while most Build to Rent developers already had many of these lifestyle elements in their planning, the pandemic certainly rocketed the evolution of community living.
Urban vs Suburban
Build to Rent investment has typically exclusively focused on delivering homes in urban locations. The percentage of households in privately rented accommodation in the UK has increased from 13% to 20% over the past decade according to ONS data. In that time, the percentage of owner-occupiers has declined, making greater opportunity to meet the demand for accommodation through homes to rent.
Whilst around half of Build to Rent homes are in London, regional towns and cities have more recently attracted substantial investment. For now, the number of homes in planning soared by 48% for regional markets totalling an expected 56,222 homes in the regional planning pipeline, compared to 12% in London. Changing trends in society, not least because of the pandemic, go some way towards explaining these numbers.
Next phase of Build to Rent
So far, there is evidence that something truly transformative is in the offing for occupiers, with investors seeking opportunities for single family Build to Rent housing schemes, to capitalise on a significant market opportunity and diversify their private rented sector portfolios. There are obvious investment characteristics which make this asset class an attractive one, and there is also growing demand. By age, 25-34 make up the largest proportion of renters in the UK, which continues to rise, with 21% growth over the last ten years, followed by 35-44 year olds reflecting a 47% growth over ten years. The latter greatly emphasises the ‘Generation Rent’ situation of younger adults who have been priced out of home ownership.
The fact that younger adults are a growing set of private renters is significant. As they move into stable relationships and start families, it is the natural phase of progression for these renters to seek larger properties, generally in less urban locations. Due to the location of suburban Build to Rent schemes which have the ability to cater for single family homes, the rents are often more affordable, than those in city centres and capture a greater depth of the rental market as a result. More than that, renters at this age would often seek gardens, locations near local amenities and within reach of employment hubs to suit their new needs. Also, they tend to be infrequent movers, not least because of ties to local schools, employment and support networks. For investors, this brings the benefits of lower tenant turnover, longer tenancy terms, and fewer and shorter periods of void. Combined, this means reduced operational costs and a more secure income stream.
Less ownership, more renting
In many ways, this all reflects a seismic shift in the UK housing market. Previously, homeownership was the goal for most in the UK, different to countries such as the US, Germany and the Netherlands where long-term rental has been more usual. However, the growing popularity of renting in the UK has paved the way for growing opportunities for homes which meet the needs of occupiers, and as a result, we have seen the growth and evolution of Build to Rent.
The next few years, I’m sure, will pose significant prospects for master developers and housebuilders to capitalise on the surge in appetite from investors for new-build single family housing for rent, in suburban locations. Only time will tell on how this performs, as Build to Rent yet again introduces something new to UK home seekers.