As a firm we are seeing a huge increase in activity in the build to rent (“BTR“) development sector. BTR is not a ‘new kid on the block’. It has been around for a while. However, in recent times it has caught the eye of some very substantial investors who are pouring money into it. At a time when there are so many uncertainties in the real estate world, it is encouraging and interesting to see such a boom. So what is all the fuss about?
What is BTR and just how big is it?
As the name suggests, a BTR development is a development of homes that are developed and built specifically for rental rather than for sale. Although part of the private rented sector (“PRS“), BTR distinguishes itself by offering good quality, energy efficient homes with longer term tenancies at more predictable rents in booming locations and with easy access to local amenities and infrastructure. The developments are professionally managed and tenants usually have enhanced communal facilities and social spaces, such as a gym, residents lounges, roof gardens and guest rooms for hire, with some developments offering 24/7 concierge services, childcare and car hire.
BTR emerged as a result of the Government’s Montague Review of the rental sector in 2012. The review’s main focus was to lower rental costs through increasing rental supply and encouraging institutional investors into the market whilst at the same time improving standards. Just over ten years on it is certainly a success story.
Since 2012 over £30bn has been invested into the BTR sector and research data from the British Property Federation (“BPF“) shows that there are now over 242,500 BTR homes in the UK which are either completed, under construction or in planning. Many more are on the way and it isn’t just the private sector that is getting on board – a significant proportion of local authorities and other affordable housing providers now have BTR in their housing pipelines. The BPF is currently predicting that the sector will be worth £170bn by 2032.
Why is it so attractive to investors?
There are many reasons but some of the key factors are:
Demand: This has continued to increase over the last decade and is expected to continue its upward trajectory. Higher mortgage rates have led to an affordability squeeze in the sales market keeping aspiring first time buyers in the rental market for longer. In addition, a lack of good quality housing in the PRS sector is being exacerbated by buy-to-let landlords continuing to withdraw from the market due to more stringent requirements and less friendly tax policies.
Scale: BTR facilitates large scale investment with each development delivering anything from 50 to several hundred homes. This leads to economies of scale resulting in enhanced rental yields.
Speed: BTR developments can be built faster than other developments which often rely on sales revenue from early units to fund construction of later units. Units can also be filled very quickly.
Security: Tenants are encouraged to stay for longer term lets which gives increased security and the potential for fewer void periods.
Other income: Investors may benefit from other income streams through creation of retail, entertainment and office space within the BTR development.
Isn’t it just for city centres?
Developers and investors initially focused on apartment blocks (multi-family homes (“MFH“)) for young professionals in London and other major cities. These developments do remain in high demand but those original customers have grown up and may want different things; they may have families of their own and/or require more or different types of space. BTR providers have grown with their customers, diversifying their offering and looking to attract a much wider customer base. As a result there has been a shift in emphasis and we are seeing a huge rise in single family homes (“SFH“) – essentially houses rather than flats/apartments – which are cheaper to deliver than MFH as they are less complex. However SFH developments necessarily need larger areas of land. Rather than being limited to the cities a whole raft of the UK is now available for investors.
What impact will the Building Safety Act have on BTR?
The Building Safety Act (“BSA“) was introduced in response to the Grenfell Tower tragedy with the purpose of securing the safety of people in or about buildings and improving building standards. The BSA is likely to have a significant impact on the design and construction of new BTR developments by placing greater accountability on building owners and developers for the safety and quality of their product. Requirements will be more stringent for higher rise developments and it may be some time until the industry really understands all the implications of the BSA, particularly as secondary legislation with the detail of many of the requirements is still awaited. The proposed Government gateways have the potential to cause delay at various points during design and development and it will be interesting to see how BTR developers and investors agree to deal with these risks. BTR investors usually look to pass as much risk to the BTR developers as possible but this may be unviable for some developers and contribute, at least in the short term, to more investment in low rise SFH rather than high rise MFH.
What about sustainability?
Most BTR investors now require an EPC rating of a ‘B’ as a minimum with net zero homes being the ultimate goal. Tenants are also increasingly interested in energy savings that can be achieved with well-designed BTR homes. As many BTR operators pride themselves on providing a ‘customer experience’ and not just a place to live and as investors have a long term interest in their units, there is a real desire to incorporate sustainable design principles and renewable energy technologies in BTR schemes.
What is next?
Although the BTR sector is unlikely to be completely immune to the ebb and flow of market conditions, the sheer scale of the developments gives BTR operators a real advantage. It is clearly here to stay. The big question is how quickly the BTR sector can grow to meet the demand – we need continued investment, realistic Government targets and Government funding together with advances in technology to continue the evolution of this booming sector. Watch this space…
Wedlake Bell has advised on a variety of BTR schemes. We have enjoyed being at the forefront of BTR; drafting and negotiating innovative documentation on behalf of house builder clients and working alongside some of the largest institutional investors in the sector.
Key points
- BTR is one of the fastest growing sectors. The BPF is currently predicting that the sector will be worth £170bn by 2032.
- The developments are growing with their customers. We are seeing a shift in the location and nature of developments, such as a move to single family homes within the BTR offering.
- Tenants and investors are mutually interested in the sustainability of developments leading to a real desire to incorporate sustainable design principles and renewable energy technologies in BTR schemes.