Investment in the UK’s build-to-rent sector has slowed in the final quarter of the year but is still on track to outpace the long-term average.
Knight Frank’s annual Multihousing Report 2022/23, published today (1 December), forecasts that the BTR pipeline has the potential to create a sector valued at £102bn by 2028.
This would be almost double its current value of £56bn, which is up 60% from £35bn in 2019.
Some £3.2bn of capital was committed to the sector during the first three quarters of 2022, with a further £650m expected to trade before the year ends.
Some investors have hit the pause button since September’s mini-Budget, but a full-year investment figure of £3.8bn would still be 31% higher than the 2016-20 long-term average.
Jonathan Stevenson, head of build-to-rent funding at Knight Frank, said: “Investors have been undeterred by a macroeconomic backdrop characterised by soaring inflation and rising interest rates. However, higher financing costs since September’s mini-Budget mean we expect a slowdown in investment in the final three months of the year as some highly leveraged investors take a pause.
“That said, deals are still progressing. Investors are buoyed by the countercyclical qualities of the sector, which remains attractive thanks to the low volatility and robust resilience of the rental market in times of economic turbulence; the structural supply shortfall of rental homes and subsequent opportunity for scale; and growing tenant demand as more people rent for longer.”
Pension and insurance firms dominate
Knight Frank said that 65% (£2.15bn) of investment in 2022 has been from pension and insurance firms, with the remaining 35% of capital invested by a combination of propcos, REITs and private equity firms.
North America was the biggest source of overseas investment into the UK’s BTR sector in 2022, making up 28% of overall capital invested. Europe made up 23% of overseas investment, with Asia-Pacific investors accounting for just 2%. Almost half (42%) of capital was invested by UK firms.
Rental growth forecast
The number of completed BTR units has tripled over the past five years to more than 72,000 in schemes of 75 units or more across the UK. Some 24% of local authorities now have at least one BTR scheme open and operational within their jurisdiction.
A further 57,000 units are currently under construction and an additional 61,000 have full planning permission granted. This brings the total pipeline to 190,000 homes (excluding sites in pre-planning).
However, rental stock remains in short supply, and Knight Frank said the outlook supports rental growth. There have been more than 260,000 buy-to-let mortgage redemptions over the past five years as private landlords look to exit the market. Meanwhile, unemployment is near record lows, the population continues to rise, wage growth remains strong and access to mortgage finance is restricting owner occupation.
Oliver Knight, head of residential development research at Knight Frank, said: “Prospects for rental growth will also be supported by the fact that the proportion of earnings spent on rent has been steadily declining in recent years and sits below the long-term average. The average renter spent 35% of their pretax income on rent in 2022, down from closer to 40% five years previously. For couples and sharers, this figure will be even lower. While we expect that rents will moderate from current highs in 2023, we believe there is headroom in the market for a period of above-average rental growth.”
BTR hotspots
Knight Frank has named Norwich, Peterborough, Cambridge, Ipswich, Stevenage, Chelmsford, Watford, Oxford, Windsor, Maidenhead, Bracknell Forest, Leatherhead, Woking, Tunbridge Wells, Portsmouth and Exeter as emerging growth markets for BTR.
These locations have strong demand drivers but typically have small BTR pipelines. The analysis incorporates population growth projections over the next 10 years, the percentage of the population aged under 35, employment growth forecasts up to 2040 and the risk of too much BTR accommodation being built.
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