There’s a buzz about build to rent right now, but does the data prove it’s a significant market?

build to rent quintain wembley

Source: Hufton + Crow

Quintain’s Alto BTR development in Wembley, London

The private rental sector has traditionally been a small market. Between 1990 and 2000, private rental units accounted for around 10% of the English housing stock. That changed with the emergence of buy-to-let, and rising house prices, with the private rental sector stock rising from 10% of the total to 17% by 2010. The most recent data (2017) shows the private rental sector accounting for 20% of the total English stock.

The above mentioned increase is due primarily to buy to let, which dominates the market, accounting for above 95% of rental supply across England. In the buy to let heyday (2006 – 2015), the stock of rental units increased by an average 200,000 units a year across England. However, with the introduction of the buy to let / second home 3% stamp duty, and stricter buy-to-let loan criteria, matters have changed, with the number of private rental units rising by just 60,000 in 2016, and falling by 45,000 in 2017.

With many unable to afford a house, the supply of public (or so-called affordable) housing restricted, and buy to let having passed its heyday, many now view build to rent as a promising means of helping deliver on the UK government’s housing target.

Many now view build to rent as a promising means of helping deliver on the UK government’s housing target 

Build to rent is certainly a growing market, although it is a small market when viewed against total housing supply. The main source of data concerning build to rent is the British Property Federation, which in collaboration with Savills, produces a quarterly analysis of the market (GB). The key metrics from this analysis centre on the development pipeline, and include units: in planning; under construction; and complete. The headlines tend to focus on the total pipeline, for instance, between 2017 Q1 and 2018 Q4 the total build to rent pipeline rose from 90,761 to 139,508 units complete, under construction, and in planning. By complete the British Property Federation means units so far completed.

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Clearly, of more significance for the construction industry is annual unit completions. While there is data highlighting the total number of completed units, there is no headline data concerning annual completions. However, the British Property Federation data suggest completions currently total about 7,000 units annually. With units under construction rising by close to 40% in 2018, this number looks set to rise over the short term, although the key question of interest is – what is the long-term potential for this market in terms of annual build numbers?

What is the long-term potential for the build-to-rent market in terms of annual build numbers? 

The British Property Federation document Unlocking the Benefits and Potential of Build to Rent (Feb 2017), states that: ”If the BTR market is able to mature and reach a similar scale of investment as the US multi-family market or the UK PBSA market (purpose built student accommodation), it would create around 15,000 new homes per year in the period to 2030.”

No doubt, build to rent can be part of the solution to the present housing crisis, although at current build rates, its contribution is small (around 7,000 units) when compared with total GB delivery of close to 225,000 units in 2017/2018 (that is completions, conversions and change of use). With the private rental sector forecast to grow further over the years to 2025 (PWC), the new-build private rental sector may well mature, and average 15,000 units a year, although as always, while the need is there, much rests with demand – that being a willingness and ability to afford.

Attracting funds

It is fair to claim that the build-to-rent sector relies upon attracting funds, that in turn are seeking a decent return on investment, and rental growth across portfolios. A key challenge, then, is the ability to deliver persistent rental growth across the sector. That seems a reasonable goal, but is it achievable? Despite a well-documented need for more rental units, and the revised National Planning Policy Framework now asking local authorities to identify how many new rental homes their respective areas need, need is one thing, demand another.

The sector does not operate outside of market forces, as indicated by data showing rental value growth slowing from around 2.5% in 2016 to below 1% in 2018. Property agents note this relates to weaker demand, which seems an obvious cause, although the issues underlying that are perhaps not so clear, and likely include an inability, or unwillingness, to afford, particularly among the younger generation.

Build to rent may simply end up being a niche market, albeit one that delivers a reasonable amount of work

Recent research from JLL found that the average age of build to rent residents was 31, and the average salary £37,321 – 30% above the UK median full-time salary. This suggests the build-to-rent sector to have a limited market. That may, upon maturity, be as noted above, around 15,000 units per annum. That compares with GB delivery of around 220,000 presently. In this sense, build to rent may simply end up being a niche market, albeit one that delivers a reasonable amount of work for the construction industry, and one that can sit alongside the delivery of home ownership and social housing units.