Build-to-rent is fast becoming a hugely important factor in the UK’s rental market growth, and there’s no sign of it slowing down as a sector.
As of the first quarter of this month, the number of build-to-rent properties in the UK, at varying stages of completion, was approaching the quarter of a million mark.
Figures from the British Property Federation (BPF) show there are now 212,177 homes in this niche sector, of which 70,785 are complete, 42,119 under construction and 99,273 in planning. This number has been multiplying rapidly over recent years, and many expect it to escalate.
According to Dave Butler, the former CEO of the UK Apartment Association (UKAA), which is a major membership body for the sector, there is the potential for the delivery of between 500,000 and 1 million homes over the next five years.
However, with current construction and planning barriers, he believes it will realistically take 10 years to reach that total. Still, quadrupling the current number of build-to-rent properties is an optimistic outlook.
Making money from build-to-rent
The sector largely appeals to institutional investors right now, who are keen to back it in its early stages as the private rented sector in general adapts to tenants’ changing needs. But Butler points out it is not a case of high stakes, high returns for these investors.
“The build-to-rent sector is characterised by sustainable, predictable returns generated by providing customers with experiences that they value,” he says. “It depends on loyalty and maintaining quality of service over the long-term.
“BTR started by providing high-end property to customers with significant disposable income, but its growth has and will continue to be driven by ordinary main-stream renters.”
Current demand in the sector is outstripping supply, meaning new schemes are being filled ahead of plan across the country, points out Butler. As a result, the sector is thriving, particularly by providing a higher quality product that offers “value and service”.
A better rental experience
One of the key differences often noted between build-to-rent and buy-to-let is the focus on renters themselves. While buy-to-let involves ‘normal’ properties, often without a particular target tenant in mind, those that are built to be rented are designed around tenants.
The sector is “characterised by institutional long-term ownership and professional management and a focus on the customer. It’s all about providing better rental experiences,” says Butler.
He notes that the sector is certainly not going to replace traditional buy-to-let, though, which currently consists of around 4.4 million homes. He uses the analogy of the difference between small, independent stores and large supermarkets, which both have unique offerings.
“Before the development of the self-service supermarket in the 1960s, most grocery shops were small, independent operators,” says Butler.
“Tesco, Sainsbury’s, etc, replaced them over 30 years because they offered a better range of products and services, convenience, consistent quality and better value. They were able to do this because they had the investment to afford scale, automation, amenities and professional management and staff.
“Independent grocery stores survive where they offer something different – higher quality, different products or better local service. BTR’s greatest innovation is to put the customer at the heart of homes for rent and as long as it does that then it will continue to thrive.”
Challenges for the sector
Butler believes the main barriers that could hold back build-to-rent in the future will be in delivering and operating the homes to the scale needed to meet demand. This includes finding land, the planning process, construction and costs, before recruitment for people to operate and manage properties.
He adds: “This may be one of the reasons why Single Family Rental has come to the fore so much over the last year or so. It is inherently simpler to build and manage and extends the sector’s appeal beyond the original demographic.”