While the build to rent sector has been subject to increasing investment during recent years, you might have been largely unaware of it unless you’re directly involved in property development. Also referred to as BTR and B2R it applies to those properties which are built with the specific intention of renting to tenants.
Although the build to rent sector is more established in America, build to rent in the UK, at least in its current guise, can be traced back to 2012, with the conversion of Stratford’s East Village from athlete’s accommodation into private rentals. Thousands of similar properties have subsequently been built across the UK, many with the backing of the government’s Home Building Fund.
In this article, we’ll take a look at the characteristics, driving factors, and impacts that new technologies are having on the expansion of the buy to rent sector.
What are the key features of build to Rent properties?
Also referred to as multifamily housing, a high proportion of build to rent properties have been constructed to house multiple families. Focused on bringing in high rental yields for investors, many owners of such properties have opted to make the investment in communal areas in order to remain an attractive proposition for tenants, with features such as gyms, lounges, and games rooms being fairly common.
If you’ve read our overview of the multifamily market then you’ll know that such shared properties are proving increasingly popular, with many American investors drawn to the superior construction quality, build efficiency, and favourable locations.
The same can be said of the UK, with £4.3bn of build to rent investment, marking a fourth consecutive record-breaking year in 2022. The trend looks set to continue, with investors looking to capitalise on the resilient yields and debt market challenges. Levels of buy to rent investment are expected to be particularly focused in major cities such as London, Manchester, and Liverpool.
What are the differences between build to rent, buy to let and rent to rent?
Before continuing our investigation of the UK’s multifamily sector, it’s worth considering the differences between build to rent, buy to let and rent to rent.
What is Buy to Let?
As the name suggests, buy to let refers to the process of buying already-constructed properties with the intention of letting to tenants. Motivations for buy-to-let landlords include the prospect of a stable income, with the potential for selling if the property rises in value. Terraced houses were reported as the most popular type of property owned by landlords in 2022 (54%), followed by individual flat units (47%) and semi-detached houses (44%).
What is Rent to Rent?
Also self-explanatory, rent to rent refers involves the renting of a property, which is then sub-let to the tenants. Such properties are typically rented from the landlord for a period of 3-5 years. Sub-letters are expected to make regular payments to the owner or letting agent, with the property being rented out at an increased price. The profit level equates to the difference in the initial rental payments and income from tenants.
What is Build to Rent?
Although often confused with the overarching buy-to-let sector, there are significant distinctions when it comes to build to rent. This sector stands apart from other private rental areas specifically in terms of the focus on the tenant experience, with buy to rent landlords offering more amenities and community connection.
How big is the UK build to rent market?
As mentioned, there has been considerable growth in the size of the UK’s build to rent market in recent years. Almost £3.2 billion of capital was invested into the build to rent sector during the first three quarters of 2022, representing a 10.2% year-on-year increase. The levels of European build to rent commitment have been particularly high, with investment in Build to Rent assets hitting £1.3bn and accounting for a record 16% share of total Q1 2023 volume.
Reasons for the popularity of the build to rent sector have been reported as:
- Low volatility and resistance during times of economic turbulence
- Structural supply shortfall of rental homes and subsequent opportunity for scale
- Increasing tenant demand
- Positive rental outlook.
The expansion of the build to rent sector has been slowed by build costs supply chain delays and the shortage of labour following Brexit. However, there are positive signs, with easing costs expected to directly affect B2R development activity and viability. Such rental opportunities are bound to take the interest of would-be property buyers who’ve been put off by inflated mortgage costs.
Build to rent expert Simon Wilson said, “The strong showing for Build to Rent in Q1 is testament to the resilience of the wider PRS sector. This has limited the yield correction in the sector when measured against the falls seen in other asset classes. We see significant appetite from clients in these sectors and expect to see strong deal flow in H2, with single-family housing predicted to see the largest increase.”
Why are landlords and property investors choosing build to rent investments?
Apart from the motivations highlighted above, build to rent investment is also proving an attractive prospect given the matching of inflation. As reported by Savills, the rate of annual CPI reached 10.7% in November, compared with a 12% rise in rents during the same period. Able to count on natural tenant churn, landlords are able to rebase their rents in line with market changes.
Landlords making such investments have realised the benefits of increased rates, high occupancy, and record lease-up rates. The sector will only become more popular given the need to satisfy increasing levels of rental demand and increased liquidity allowing for the strengthening of market pricing.
Forward funding looks set to continue as a popular route into the build to rent market, with 75% of investments made following this process over the last five years. It is seen as an attractive prospect for investors, given the opportunity to drive value during construction. This follows the narrowing of the risk-free rate, with the yield on a UK five-year GILT having risen to 3.3%, from 0.9% 12 months ago.
Landlords can expect a relatively high net operating income (NOI), given that the average multifamily property takes between 3 and 5 years to build and stabilise. In turn, this raises the yield on cost (YOC), with an expansion of the premium over the risk-free rate. Equity-rich investors are also reported to be in a strong position to make the most of slack in construction capacity through 2023 and beyond. There are bound to be more partnerships between developers and investors, with both looking to secure their development channels.
How does technology empower the build to rent sector?
There has been significant development in technology for the powering of the build to rent sector over recent years. This has benefited both the tenant and the other landlord or developer, with the digitisation of previously paper-based processes making for much greater efficiency.
Technology such as the integrated Property Inspect app, is enabling the entire leasing process to be managed digitally and remotely. Savvy build to rent investors are also catering for their tenants with the integration of social networking solutions for the fostering of close-knit communities.
There’s been an increase in the adoption of internet of things (IoT) technology across BTR developments too, as seen in the unlocking of networked IoT sensors and AI-powered monitors for improved block management. Able to rely on the automatic logging of evidence and alerting of team members, property managers are now more able to focus on the essential aspects of tenant satisfaction.
You too can realise the efficiency-boosting benefits of integrated property management by signing up for a free trial of Property Inspect for the digitisation of your build to rent management and processes.
