View all articles
Build-to-rent schemes are fast emerging as an attractive investment avenue for property developers and institutional investors.
Demand for rental homes within the UK has skyrocketed over recent years, creating a favourable environment for build-to-rent investors to swoop in and efficiently cater to this surge in demand.
Build-to-rent properties are typically large developments containing many individual units. Operating on such a large scale, they offer many tenants access to modern, well-maintained living spaces and an efficient, hassle-free service. Consequently, those who invest in the build-to-rent sector often enjoy the benefits of satisfied tenants and consistently high returns.
In this article, we will explain more about how build-to-let schemes work, exploring both the advantages and potential drawbacks of these investments.
What is Build-to-rent?
Build-to-rent, often abbreviated to BTR, is a relatively new development within the UK’s rental market. It is an investment strategy that involves the construction of new residential units, often apartment blocks, specifically designed to be rented out upon completion rather than sold to individual buyers. A crucial attribute of build-to-rent is its uniformity of ownership; all properties within a given development are privately rented and managed under one single ownership.
Build-to-rent projects typically involve large-scale developments, sometimes spread over multiple properties. Each development usually contains a minimum of 50 units, allowing for more efficient and streamlined management.
Build-to-rent developments are designed to cultivate a strong community spirit amongst residents. To facilitate this, they often feature a range of on-site amenities, including gyms, concierge services, and shared communal areas.
These modern living spaces have gained popularity amongst the younger demographic, particularly new graduates and young professionals. Catering to the lifestyle preferences of these urban dwellers, most build-to-rent developments are strategically built within the vibrant hearts of bustling urban cities.
Build-to-rent and the UK Housing Market
The UK is currently grappling with a housing crisis, and build-to-rent developments present an efficient and scalable solution to help alleviate this problem.
A combination of factors has placed homeownership out of reach for an increasing number of people. High living costs, soaring property prices, and steep interest rates have conspired to create an environment where more people are renting for longer periods, and the rental market is feeling the strain.
This high demand for rental properties and a tight supply has driven rental costs upwards, making it more difficult than ever for people to find suitable and affordable housing.
Build-to-rent projects, backed by savvy investors, hold the potential to significantly increase the availability of high-quality rental properties within given areas. This approach not only alleviates pressure on the rental market but also contributes to improving the overall standards of living for renters.
The UK government has backed the build-to-rent initiative, hoping that these developments will offer tenants a superior and reliable rental experience.
An integral aspect of the build-to-rent strategy is its contribution to affordable housing provision. According to government guidelines, 20% of the units within a build-to-let development should be designated for affordable housing. This is, however, a benchmark figure and may vary from one local authority to the next. The government recommends that affordable housing prices be at least 20% below the prevailing local market rents.
Through its capacity to deliver high-quality rental properties and contribute to affordable housing provision, the build-to-rent model holds the potential to address some of the challenges currently experienced in the UK’s housing market.
Pros and Cons of Investing in Build-to-rent
The UK’s build-to-rent sector is witnessing significant growth, driven by investors who see the potential benefits of these schemes combined with the rising demand for rental properties.
Benefits of Build-to-rent for Investors
Investing in build-to-rent development projects can yield lucrative returns on a large scale. These properties typically generate high rental yields and provide a consistent, long-term income stream. Investors can demand higher rent on build-to-rent properties thanks to the added value of on-site amenities. As well as earning residual rental income, investors can also look forward to gaining potential long-term capital growth from owning the property. With the high living standards offered by these properties and the longer tenancy periods they attract, build-to-rent investments tend to enjoy high demand and low vacancy rates, further contributing to their profitability.
Unlike traditional buy-to-let properties, build-to-rent properties are contemporary buildings designed with their target audience’s preferences in mind. Because they are new builds, build-to-rent properties tend to require minimal repairs and maintenance, especially during the initial decade of their lifespan, causing less hassle and expense for property owners. And, if a problem does arise, most build-to-rent developments are managed by a dedicated property management company, meaning issues are rectified very quickly and efficiently with little input from the owner.
Benefits of Build-to-rent for Tenants
Build-to-let properties are popular with tenants for several reasons. Firstly, the superior living standards, which outstrip many buy-to-let options, appeal greatly. Tenants can enjoy modern, energy-efficient developments free from issues like dampness, deteriorating plaster, or worn-out fixtures. Additionally, build-to-rent developments also feature enhanced security measures, offering tenants increased peace of mind.
Beyond providing a well-maintained and secure living space, build-to-rent developments cater directly to their primary audience – young professionals – through added amenities such as concierge services, gyms, roof gardens, and communal areas to accommodate social interaction between residents. Furthermore, build-to-rent living provides more stability to tenants, offering longer tenancies of three years or more and less chance of disruptions, which can occur in buy-to-let situations if landlords need to reclaim or sell their property.
Challenges of Build-to-rent for Investors
Despite its numerous advantages, investing in build-to-rent also has its drawbacks. One notable downside is that it may not be a feasible investment opportunity for average landlords or small-scale investors due to the substantial initial investment required. This high-entry barrier makes build-to-rent predominantly suitable for high-profile property developers and institutional investors who can bear the associated costs – site acquisition, design and planning expenses, infrastructure contributions, and construction costs.
Investors should also anticipate delayed returns on their build-to-rent investments. While residual income begins to flow as soon as tenants move in, the majority of early earnings will go towards covering loan repayments, with net positive returns not materialising for some time.
Challenges of Build-to-rent for Tenants
Build-to-rent apartments typically offer a modern living space in a prime location, a community spirit and convenient on-site facilities. leaving tenants with little to complain about. However, there are a couple of minor drawbacks to living in a build-to-rent. The primary downside for tenants is the higher rental cost. Build-to-rent accommodation tends to be a little more expensive to rent than an alternative, comparable property due to the additional facilities they offer.
Moreover, on a subjective level, some tenants might feel that modern build-to-rent apartments lack the character of older buildings and may find them relatively compact in terms of living space.
What Does the Future Hold for Build-to-rent?
Although build-to-rent properties currently make up a relatively small proportion of the UK’s rental market, the number is rapidly growing. According to Savills, as of Q1 2023, the UK’s build-to-rent inventory stands at 82,500 completed homes, with another 49,500 homes currently under construction.
The build-to-rent model is attracting considerable interest from investors who have identified the scheme as a highly promising opportunity in the face of the national housing shortage. According to the property consultancy firm Knight Frank, the UK build-to-rent market witnessed an influx of £1.7bn in institutional investment in the first half of 2022, riding the wave of a record-breaking £4.3bn invested in the preceding year, 2021.
Until recently, build-to-rent properties have been primarily located within the heart of city centres. However, developers are now exploring new horizons, aiming to expand into suburban areas close to schools, amenities, and transport links. These suburban expansions aim to build family homes using the same build-to-rent model, generally focusing on houses rather than apartments.
Presently, according to RPS Group, only around 5,000 completed suburban build-to-rent exist in the UK. However, this housing model is expected to gain significant momentum in the coming years.
As the demand for high-quality, flexible housing solutions persists, it’s likely that the build-to-rent sector will play an increasingly prominent role in the UK’s property market, benefitting investors, tenants, and the broader community alike.
What to Consider When Investing in Build-to-rent
If you possess the financial means and knowledge to invest in build-to-rent property, it could prove to be an exceptionally rewarding enterprise.
Prominent names in the sector include Greystar, Lloyds Bank, John Lewis, Legal & General, and Sigma Capital Group, a testament to the opportunities build-to-rent presents.
Below we’ve listed some key steps to consider when investing in the build-to-rent market.
Do Your Research
Your initial task is to understand the build-to-rent landscape thoroughly. Immerse yourself in studying this investment model’s rules, regulations, and costs. Ensure that build-to-rent aligns with your financial goals before diving in.
Select a Site
Conduct market research to identify high growth areas that demonstrate strong demand for rental properties and high rental yield potential. Once you’ve identified a few areas of interest, research local amenities, transport links, and the demographics of renters in the area.
Obtain Planning Permission
Once you’ve settled on a site for your development, you’ll need to obtain planning permission. This can be a lengthy process. Bear in mind that many lenders will expect you to have obtained planning permission before they will consider discussing financing options with you.
Create a Finance Strategy
Build-to-rent projects require significant capital investment, making establishing a feasible financing strategy crucial. This could involve reaching out to banks for loans, partnering with private equity firms, or exploring other financing options that suit your circumstance.
Create an Exit Strategy
Planning your exit strategy in advance is essential. This could involve selling the property or restructuring the investment.
Assemble a Team
Build-to-rent projects require a diverse team of professionals. Your team should include architects, builders, property managers, legal experts, and marketing professionals. Building a competent team can mean the difference between a successfully executed project and a disaster.
Property Design and Development
Next, your project will go to the architects and designers. They will design a property that caters to your target demographic, aligns with modern living expectations, accessibility, and the inclusion of on-site amenities that can significantly enhance the appeal of your development.
Property Management Strategy
Effective property management is a very important aspect of a build-to-rent scheme. With such a large number of units in every development, it is essential to have a clear strategy for tenant acquisition, rent collection, maintenance, and tenant relations to ensure that the development runs smoothly from day-to-day. Most investors use the services of a dedicated property management company to achieve this.
Ensure Ongoing Compliance
Adherence to laws, regulations, and building codes is non-negotiable. Ensure that you stay up to date with any legal changes that may affect your project to ensure legal compliance and tenant safety.
The build-to-rent sector offers an exciting opportunity for institutional investors and property developers, driven by the rising demand for high-quality rental homes and government support.
However, it’s not without its challenges, including significant capital requirements, the need for meticulous planning, and the potential for delayed returns. As a modern solution to the UK’s housing crisis, build-to-rent offers a more efficient and scalable solution to the demand-supply imbalance whilst also offering superior living experiences to tenants.
The growth of the build-to-rent sector is likely to continue, particularly if it expands into suburban areas. For those considering investing in build-to-rent, understanding the landscape, doing diligent research, planning, and assembling the right team is critical for success.
