The UK Build-To-Rent Boom: Background and Key Features

In part one of this two-part series, LoopNet looks at the recent history of the UK’s private rented sector and learns how the emergence of build-to-rent has established a new type of asset class. Part two tackles the demographics of BTR tenants, the three branches of BTR growth, and what the future has in store.

It’s no secret: there is a rental housing crisis in the United Kingdom. A recent market update from property advisor Savills for the fourth quarter of 2021 indicates that the number of properties available to rent during that period was 39% lower than the 2017 to 2019 average. The report also found that 230,000 new rental homes per year are required across the country to avoid a shortfall.

Enter build-to-rent (BTR), a type of housing asset in which new, large-scale developments are built specifically for the rental market. Although BTR is a relative newcomer to the U.K.’s private rented sector (PRS), proponents say it’s exactly what the U.K. housing market needs right now to help drive supply and keep rents from inflating even more than they already have.

According to another recent report by JLL, build-to-rent (BTR) is the fastest growing sector in British real estate, with supply increasing by over 50% per year since 2015. The report also indicates that the sector has the potential to increase another ten times in size if market penetration in the private rented sector reaches levels like those seen in the United States multifamily market, eventually generating a potential 20 billion pounds (approximately US$25 billion) in annual transactions.

With those kinds of numbers, it’s no surprise that more and more investors are taking an interest in build-to-rent and hoping to take advantage of its growth potential and increasingly stable income streams.

But BTR is still a nascent industry, and many questions remain as to how it will perform in the future as demographics and supply and demand fundamentals change. That’s why LoopNet sat down with two industry experts to help better understand what build-to-rent is and where it stands as an asset class.

The private rented sector is a UK government classification of housing tenure that includes any property that is privately owned and rented out. This distinguishes it from owner-occupied dwellings and housing rented from local authorities or housing associations.

As such, PRS encompasses everything from professionally managed large-scale blocks to single homes owned as an investment and rented out by individual landlords, the latter of which make up the vast majority of the PRS in the UK.

“In the UK, as in a lot of the rest of Europe, we had a government-sponsored social housing construction boom in the 1970s,” said Nigel Allsopp, senior director of investment strategy and research at Greystar, a vertically integrated real estate company that offers investment, development and property management services, and a major player in the UK BTR market.

“That was when we had the peak of social housing construction,” Allsopp continued. “And then, there was a change in housing policy and we kind of stopped building it. And so, what happened in the rented sector is that the social housing sector got smaller, and the private rented sector got bigger.”

The 1980 Housing Act introduced the government’s right-to-buy programme, giving five million council house tenants in England and Wales the right to buy their houses from their local housing authority. This led to millions of homes being transferred from the social rented sector to owner occupation.

Then, in an attempt to bolster the PRS in response to the recession of the early 1990s, the Association of Residential Letting Agents (ARLA), in partnership with a small group of lenders including Paragon Bank and Natwest, created the buy-to-let (BTL) mortgage in 1996 to help individual investors finance a second property to let out as a rental unit.

“So basically,” Allsopp said, “mortgage financing got really cheap, and it meant that what you might call 'mom and pop' landlords proliferated and they really dominated the private rented sector market.” As a result, Allsopp said, “98% of landlords in the UK are essentially amateur landlords.”

But in recent years, tax policy in the BTL sector has changed, leading to increased transaction taxes and reduced mortgage interest relief on individual rented properties. This has led many private landlords to sell their properties and exit the market.

A December 2021 survey by the District Councils’ Network confirmed this trend, reporting that 76% of local councils have seen a rise in landlords either selling or converting their properties to Airbnb lets, a tendency which has only exacerbated the nationwide rental housing shortage.

As part of the 2012 Montague review of the lack of institutional investment in private rental properties, the UK Government coined the term build-to-rent (BTR) to distinguish professionally managed, large-scale and institutionally invested rental housing from the broader private rented sector.

“There were a number of local authorities in the UK that grasped the needs that they saw in their local housing market,” said Ian Fletcher, director of real estate policy at the British Property Federation (BPF), a nonprofit membership organisation representing companies involved in property ownership and investment.

Fletcher added that there was “an appetite to look at something that would deliver for younger people who can't access government-supported housing and equally can't buy their first home.”

The 2012 report found there was a “real potential” for investment in large-scale development of homes built specifically for private rent by professional organisations, and that with the right market conditions and public policy in place, BTR could become a significant additional source of supply alongside for-sale and affordable housing.

“I think the thing that's prompted build-to-rent in the UK has been the market conditions,” Fletcher confirmed. “Both a need for private rented sector accommodation and an appetite for a quality rental offer.”

Ten years after the Montague review – and after going through several different iterations – a significant portion of BTR has evolved into a whole new type of rental product, distinct from other large private rental blocks.

“Physically, it can be quite different stock,” Allsopp said, “and it's operated quite differently to even other new-build stuff.”

Notably, many operators in the BTR sector are drawing inspiration from the hospitality sector (and from the multifamily sector in the United States) to deliver a high-quality rental product that is also professionally managed. And as competition in the market increases, the race is on for amenities that can add value not only in terms of cash flow – through increased rental income and occupancy rates – but also in terms of brand recognition.

“The analogy I draw,” Allsopp said, “is when Marriott established their first hotel brands and they established a form of business hotel, which now we take for granted. But back then, it was motels and 'mum and dad' hotels. It was just a new product.”

And renters are responding positively to this shift toward round-the-clock service and high-end amenities like pools, gyms, cinema rooms, coworking areas, terrace gardens, event spaces and even pet spas. All of which feed into the concept of a customer renting a communal living experience rather than just an apartment.

“People like the communal facilities,” Fletcher said. “The feeling of community, the spec of their homes, how it’s integrated well into the broader local community, the amenities that go with it. All those sorts of things have been really well received.”

Aside from hotel-style amenities and professional management, here are some of the main characteristics that Fletcher and Allsopp say define build-to-rent in the UK:

• A variety of homes at different price points. Contrary to popular belief, BTR isn’t only aimed at high-income consumers. In fact, according to a joint study conducted by the BPF, London First, Dataloft and the U.K. Apartment Association, BTR caters to roughly the same income distribution as the broader private rented sector, with more than half of renters earning between £19,000 and £44,000 per year.

  “A lot of our members are aiming [their products] at the midmarket,” Fletcher said, “and trying to produce a quality product that is not going to be overly priced for people's incomes [that are] obviously particularly tight at the moment with rising inflation and the cost-of-living crisis in the UK.”

  Another recurring trend is specific developments catering to consumers at different stages of their lives.

  “I think what you're going to see in the rental sector in the UK,” Allsopp said, “is throughout your lifetime, there will be different product types for different times in your life. From student housing through urban living, to multi-family, to single-family rentals.”

• Long-term stability for tenants. Unlike the standard six- to twelve-month tenancies common to most PRS homes, the definition of build-to-rent in the National Planning Policy Framework glossary states that developers will, as a norm, offer longer tenancy agreements of three or more years to all new tenants who want one.

  This norm was established in response to the findings of a 2018 consultation by the then-Ministry of Housing, Communities and Local Government that sought to ensure “a fairer and more affordable private rented sector that provides security and stability for both tenants and landlords.”

  And for the most part, as the BTR sector has grown, operators have hopped on the longer-tenancy bandwagon to help secure higher occupancy rates and limit void periods, thereby leading to better long-term asset performance.

  “Most of the providers in the build-to-rent sector right from the start said ‘we'll offer three-year tenancies as a standard, sometimes five years’,” Fletcher said. “And clearly, if you’re a particular part of the demographic – like families with children – that is something that attracts you.”

  Still, Fletcher says it’s taken some time for consumers to adjust to the idea of longer tenancies, as a trust relationship is built between tenants and landlords.

  “I think there's a familiarisation to go through [to] develop that trust with the landlord,” Fletcher said. “Some of the early schemes, the first time, people took a year. And then they've come back after their year and said, ‘yeah, we're now comfortable to take three years.’ And we've seen an increase in the longer tenancies being taken.”

  “As we move forward,” he added, “and we're back in an environment, certainly for a period, that is seeing strong inflation, people are liking to stay put, and they will normally get a better deal doing that than going around fishing in the market and seeing rental inflation.”

• Social integration. A key factor for local councils in the development of BTR policy has been the inclusion of discounted market rent (DMR) schemes, meaning BTR developers can fulfill their obligation to provide affordable housing by including it on-site on a ‘tenure blind’ basis. That means affordable units are integrated into the development, with all homes sharing the same entrance, communal facilities and management services.

  “It’s the same fit-out,” Fletcher noted, “so you're not getting a poorer kitchen fit-out or bathroom fit-out because you are in the affordable housing; it's all the same product. So, there will be some people who are on different rents than other people, but the product will look exactly the same. And that's great for community building.”

• Placemaking. Emerging out of the urban planning movements of the 1960s and 1970s, placemaking is an approach to planning, design and management of public spaces that aims to promote people's health, happiness, and well-being.

  For many BTR landlords, the size of their buildings – typically between 250 and 300 units, according to Fletcher – as well as the fact that they often own the surrounding land, means they have both a unique ability and considerable incentive to create, manage and maintain good quality places.

  “Long-term investors tend to have their eye on good placemaking,” Fletcher said, “because ultimately, the building doesn't have to only perform when it's built. It has to continue to perform over a long period of investment.”

In part 2 of this series, we’ll take a look at how BTR performs as an investment, including the demographics of BTR tenants, the three branches of BTR growth, and what the future has in store.