UK Build to Rent Sector Booming

4.1 billion GBP from large domestic and international firms flooded into the nascent British build-to-rent sector in 2021 and the industry is predicted to grow further in the coming year. Firms, including Lloyds Bank, are attracted to a product that has proven reliable returns despite the uncertainty of the COVID-19 pandemic.

Build-to-rent is a style of development which is emerged in the United States and is growing internationally in Europe and Asia but is only a few years old in the UK. Their target market is young individuals and couples in professional jobs, and developments are concentrated in big cities, especially London. Entire apartment blocks or even larger sites are managed by one company which also provides amenities such as gyms, maintenance teams, or even puts on events for residents. For example, a flagship development in London called the East Village covers 67 acres and houses 6,000 renters. This is very different from the UK’s current rental stock which is made up of some small scale buy-to-let developers, the largest being FTSE 250 constituent Grainger, but most individuals provide 89% of rental properties.

Investments into the build-to-rent sector in 2021 were 500 million GBP higher than the previous record set in the previous year and the trend is set to continue into 2022. Already 4.6 billion GBP investment has been proposed or is going ahead for the coming year. Institutional investors have committed to becoming landlords, seeing the sector, together with logistical infrastructure, as safer for long term investment than commercial and office developments, which are heavily affected by COVID-19.

Many key players in this trend are not established firms – instead, approximately a third of the 2020s surge came from entirely new entrants to the market. The intentions of these firms are for long term investment in a low-interest-rate environment. Investors include giants such as Goldman Sachs, Macquarie, Greystar, Patrizia, Legal and General and even the retail chain John Lewis has plans to invest. Compared to the current size of the market, the investment is immense. Lloyds Bank plans for a 50,000 rental property portfolio in the next 10 years. This would make it the largest landlord in the UK with more than five times Grainger’s number of properties.

This considerable investment could help reduce the housing shortage and could alleviate prices in London, where much of the investment is targeted. However, the emotive and political nature of housing means firms in the industry are at risk of government intervention. This has happened recently in Spain and Germany where corporate landlords have been accused of driving up rents and are facing heavy regulation. Another risk for firms investing from outside the market is due to the emotive nature of housing. If they are seen to act unethically, they could face reputational damage to their wider business.  

Another risk facing investors is whether the construction industry can accommodate the growing demand for build-to-rent. While there has been enormous investment, this is coming alongside construction cost inflation, higher environmental and quality demands on housing, and demand for affordability. Fierce competition in the market could drive down the profits that attracted firms initially.

Young renters, for whom buying a home is becoming increasingly difficult, face the prospect of spending their entire life renting. Is build-to-rent a solution for a happy long-term living? There are drawbacks; one is cost. The additional services provided with the property causes rents to be higher. The East Village site mentioned earlier rents at a 9.3% premium on surrounding similar properties, and the average premium is estimated to be 11% on build-to-rent sites. Some benefit comes from more predictable rents and longer-term security than individual landlords can offer, as the property is less likely to be pulled from the rental market.

Moreover, despite offering more professional management of properties, there have still been common rental complaints such as poor maintenance and dampness, according to a Financial Times survey. As the build-to-rent sector in the UK is only a few years old, there is also no long-term information about how these developments will age and how the developers will maintain the properties.

Overall, the expansion of build-to-rent could be interpreted as a modernisation of the British housing sector to be more in line with other developed economies. For investors, there are high returns and for renters, there is the security and the amenity of professional rental management. Regardless, large institutional build-to-rent schemes are growing and are predicted to become a powerful force in the housing industry.

Analyst: James Miller

Sector Head: Charlotte Snell