Andy Jones, group director, corporate lettings & BTR at Leaders Romans Group (LRG), looks at the positive fundamentals behind the suburban BTR sector.
In the past few years, political and economic uncertainty caused some fluctuations in the property market: following the Truss Government’s disastrous mini-budget, analysts including Credit Suisse and Capital Economics predicted house price drops of as much as 15 per cent and volume builders including Barratt Developments and Bellway were reported to have abandoned growth plans for this year.
The bounce-back following the election of a new Prime Minister and Government didn’t occur quite to the extent that was hoped, although August’s drop in interest rates is a positive sign.
But as much of the property industry is finding, those factors which dented confidence in the private sale market are having the reverse impact in the private rented market (PRS): higher mortgage rates, the potential of a housing slump and financial instability fuelled demand for rental properties and continue to fuel further rent increases for the foreseeable future.
Despite this potential, the private rented sector (PRS) is failing to meet demand following the withdrawal of thousands of amateur landlords from the market (since Q1 2017, there have been more than 180,000 buy-to-let mortgage redemptions).
A natural change in direction, therefore, is for developers to capitalise upon the buoyant rental market. With, according to the English Housing Survey, the number of households renting privately having increased by 93 per cent in the last 15 years (while the number of owner-occupied households grew by just three per cent) there are incalculable advantages in doing so.
From a developer’s point of view, investment in Build to Rent (BTR), or conversion of a private sale scheme into BTR is an increasingly viable product. BTR offers a very different product and investment opportunity to that of the traditionally perceived rental model: it is precisely what is needed to professionalise the private rented sector, providing a secure home and a high standard of both bricks and mortar, and service.
The regional growth of BTR is another reason to invest: high quality rental properties (whether coliving schemes or single family housing) are no longer limited to the major cities. Until recently, the vast majority of BTR schemes have been in London, but regional growth has now surpassed growth in the Capital. The BPF’s Build to Rent Q1 2022 analysis found that whereas 5,802 completed BTR homes were in London, 5,901 were in the regions. Regional BTR grew 16 per cent year-on-year, to reach 58 per cent of the total BTR sector pipeline; London, meanwhile, lags behind slightly with 12 per cent year-on-year sector growth and 42 per cent of the total pipeline.
Another reason is the increase in families choosing to rent, rather than buy, is another. According to Government figures, the number of renting households with dependent children has doubled since 2003/4, and now makes up 30 per cent of the sector. The same survey shows that the numbers of ‘comfortable renters’ (those in managerial professions, who hold degrees and are in good health) are expanding too, with this demographic representing 1.94 million households (44 per cent of the PRS). Furthermore, a substantial proportion of ‘comfortable renters’ expect to remain within rented properties long term.
It is this shift in the demographic profile of renters and the significantly increased numbers choosing to rent that has turbo-charged the BTR sector. The British Property Federation (BPF)’s Build to Rent Q1 2022 report reveals that the number of completed BTR homes rose by 19 per cent during 2021.
As the inevitable conclusion of each of these factors, a new model has evolved: the BTR suburban community. Providing desirable homes for families in fully-functioning serviced communities, this product – which offers growing families considerable flexibility and a wide range of options for a hassle-free lifestyle – is undoubtedly the sector in which we will see the greatest growth over the next decade.
The potential for expansion of this sector is almost unlimited, as maturing Millennials seek family homes in bespoke communities. Those who have previously experienced the high level of service provided by traditional co-living BTR schemes are thought likely to form the core market for BTR suburban communities. Its early iterations suggest that this will become recognised as an innovative, service-based product compares favourably with most of the PRS stock, and the popularity of the product will enable BTR suburban communities to attract additional investment and grow at pace.
For developers, there are other distinct advantages in creating BTR suburban communities in an uncertain economic climate. One is that the variety of property types (residential, commercial, retail and leisure) which exist within any one community provides the opportunity for both immediate sales revenue and long-term rental revenue, with the potential to alter the make-up of a scheme according to the market conditions. There is considerable potential for amalgamation with other property classes including the later living and affordable housing sectors, joint ventures leading to innovative cross-subsidies, and public/private partnerships provide further opportunities.
Furthermore, the BTR suburban communities model in the UK undoubtedly has some catching up to do with other markets: in Europe a high proportion families rent (as many as 60 per cent, for example, in Switzerland ) and in the US the predominant form of BTR, accounting for 70 per cent of the market, is larger, family-oriented homes, within low-rise, suburban developments.
Research among global institutional investors found that 70 per cent anticipated being active in the single family housing market within the next five years: a substantial increase from the 42 per cent currently active. With John Lewis and others leading the way with significant success, the opportunities for developers are considerable.
Andy Jones is group director corporate & build to rent at Leaders Romans Group.
