BTR sector set to keep growing as economic situation worsens

By Adam BransonThu 27 October 2022

Experts say well-managed rental homes will be seen as stable option as interest rates rise and recession looms

A decade ago, hardly anyone had heard of the build-to-rent (BTR) sector. How things have changed. Today, BTR has become a favourite pick for investors, with billions in institutional capital going into the sector.

What’s more, BTR’s growth is set to increase markedly, according to research published by the British Property Federation (BPF) and Savills last week. The organisations predict that the number of completed BTR homes could increase five-fold to reach 380,000 by 2032.

If that were to transpire, the sector would be worth some £170bn. It would also mark a fundamental shift in the private rented sector (PRS).

Today, BTR homes represent just 1.5% of PRS stock, but the BPF and Savills say the share could increase to 8% in just 10 years’ time. So, why is the BTR sector proving so popular? And what might get in the way of its development?

The research was undertaken to mark the 10th anniversary of the Montague Review, which was commissioned by then housing minister Grant Shapps. It aimed to identify barriers that were preventing institutional investment in purpose-built homes for rent and to come up with solutions.

“Demand for high-quality homes for rent is only going to increase”

Jacqui Daly – Savills

Ultimately, the review’s recommendations included more support for BTR in national planning policy and local plans, the release of more land for development and the standardisation of tenants’ rights, all of which the government adopted.

They certainly seem to have worked. As at Q3 2022, £30bn has been invested into the BTR sector, delivering 76,800 completed homes, according to BPF and Savills. A further 163,400 units are in the planning and delivery pipeline.

“The Montague Review was a significant moment that gave birth to the BTR sector as we know it today,” says Ian Fletcher, director of policy at the BPF. “Ten years on, we can say the review achieved its core aim of unlocking long-term institutional investment into homes for rent.”

Jacqui Daly, director of residential research at Savills, agrees. “When the Montague Review was undertaken in 2012, UK housing delivery was at its lowest level since the post-war period and uncertainty in the lending markets post global financial crisis was suppressing delivery from traditional housebuilders,” she says. “What is clear is that the demand for high-quality, professionally managed homes for rent is only going to increase.”

Shallow trajectory

So, the rise of BTR has been remarkable and could yet be more remarkable still, but it has to be said that growth to date hasn’t lived up to previous expectations, according to Ashley Perry, investment director at Apache Capital. He points out that Savills’ competitor Knight Frank previously predicted total investment volumes would hit £50bn by 2020. Two years on from that prediction and the sector is still £20bn short. “The trajectory is shallower than anticipated,” he says.

However, Perry believes BTR will continue to grow.

“The financial situation is going to push more people into the PRS”

Ashley Perry – Apache Capital

After all, home ownership has been declining in the UK since around 2003, with more people renting for longer. In such a situation, a sector that provides secure tenancies in modern, well-maintained homes is an attractive option compared with the wider, largely unregulated PRS.

What’s more, the expected recession is likely to be long and potentially deep, according to the Bank of England, which will inevitably mean fewer people making the move from renting to owning. Again, BTR will look like the more stable option if ownership is off the table.

“I’m not saying that everyone’s suddenly going to be renting rather than owning,” says Perry. “But the financial situation that’s already impacting everybody is going to push more people into the PRS.”

Rising interest rates

Robert Sloss, chief executive officer at HUB Residential, says that a key issue at the moment is rising interest rates, which are highly unlikely to go into reverse any time soon given the UK is seeing inflation hovering around the 10% mark and despite the looming recession. “The age of very low interest rates is over,” he says. “That’s going to maybe push people more towards renting. [People will be] naturally drawn towards BTR product because you’re going to get something decent that’s run professionally and so on.”

The BTR sector should also benefit from the fact that it is increasingly understood by local planning authorities. According to the BPF and Savills report, 47% of local authorities now have BTR in their housing pipelines, versus just 20% in 2017 – a remarkable turnaround in just five years. Dan Batterton, head of residential at Legal & General Investment Management, attributes this to the Montague Review.

“A really important thing that came out of it a few years later was a definition of what BTR actually is,” he says. “It sounds really boring, but it allowed planning committees and planning authorities to define BTR and have policy specific to it. It allowed government to think about BTR in a tax and legal sense differently. I think it really helped. It’s a new business model that is working. Investors seem happy, more money is coming in and it is growing.”

Building momentum: according to the BPF and Savills, 47% of local authorities now have BTR in their housing pipelines – up from 20% in 2017

In addition, Batterton says the rise of BTR has meant that more units, especially in dense urban areas, have been delivered than would otherwise have been the case and that should continue. Most traditional housebuilders, he adds, worry about building residential blocks in city centres because if the market turns they will be left holding hundreds of units they can’t sell. BTR developers have no such qualms.

“They’re not particularly attractive for a build-to-sell developer, where he’s got the risk of being left with a load of apartments in one location and he’s going to receive 400 apartments completed on the same day and suddenly has to sell them all,” says Batterton. “I do think a lot of the building that’s happened wouldn’t have happened if it was just left to those build-to-sell developers. I think that is genuine new supply that we’re providing.”

For Stephen Young, senior investment manager at Kajima, however, the reason that the BTR sector has got to where it is today and will continue to grow comes down to a series of macroeconomic factors that taken together provide confidence to investors. “There are forces in place that have been several decades [in the making],” he says.

“We have the lack of affordability of ownership; we have a lack of public investment in affordable homes. We therefore have more and more people being caught up in the private rented sector, and the status quo is not very good – there’s a lack of standards and regulation. There’s an obvious opportunity to improve it, so we see BTR as a good macro-supported business model.”

Experts say well-managed rental homes will be seen as stable option as interest rates rise and recession looms