Unlocking the planning system will be key for sustaining and stimulating growth within the UK’s Living Sectors.
This was the expert consensus at our recent ‘Living Sectors’ Seminar & Panel Discussion (opens a new window)’ event. Covering numerous topics affecting the real estate and construction sector, the interactive event assembled various industry experts who identified the major trends explored below.
Importance of developing legislation
The UK Government is targeting the creation of 1.5 million new homes (opens a new window) over the course of this parliament. To successfully deliver ambitious goals like this, modification of the planning system may be required. The Government has signalled it aims to introduce more delegation for officers, routes for bypassing planning committees, and enhanced training for planning committees. A current example of planning change is reform of the National Planning Policy Framework (NPPF) (opens a new window) to unlock ‘grey belt’ land for development.
Meanwhile, in February, the House of Lords held the second reading of the Renters’ Rights Bill (opens a new window). This piece of legislation seeks to abolish ‘no fault’ evictions, remove fixed-term assured tenancies, and introduce a Decent Homes Standard to the private rental sector. While Build to Rent (BTR) may be able to weather some effects stemming from the bill — such as tenancy length exclusions for student accommodation — the effect on other parts of the private rental sector may be potentially much more significant. Landlords could be forced to withdraw stock from the market — which could act as a catalyst to increase demand for BTR developments.
It can be prudent for investors to wait and see how legislation develops to understand where risk lies. Beyond planning permission and renters’ rights, legislation is also influencing ESG considerations.
ESG considerations
It is crucial that investors remain mindful of the need to incorporate sustainability aspects into new developments or renovations of existing stock. Negligence of this issue could have severe economic ramifications, with a recent report estimating the UK housing sector could lose up to £31 billion (opens a new window) in private sustainable investment.
For any BTR project, energy performance certificates (EPCs) are a critical area of ESG consideration. Currently, the UK Government requires any abode to achieve an “E” rating to enable it to be rented. This is an area that requires close attention, as a recent Government led consultation (opens a new window) proposed uplifting the minimum EPC rating to a “C” for privately rented homes, by 2030. BTR developers could look to install heat pumps, solar panels, and improved heating controls, where possible, as these are commonly valued by renters.
Finding value in location
While Manchester has become the ‘poster child’ for BTR investment in the UK, it is important that developers consider targeting areas outside tier-1 cities. For BTR projects, it is crucial to research the local job market. Commutability and employment prospects will be key factors for attracting tenants, as renters — in comparison to homeowners — generally place more value on convenience and closer proximity to their work.
BTR constructors should be open and willing to research lesser-known locations. If developments facilitate easy access to stable, appealing jobs, this will help garner interest from prospective tenants. However, before initiating projects in areas developers are unfamiliar with, it is critical that the affordability and viability of housing is matched up with rents that investors will be able to charge.
Emergence of single-family housing (SFH)
SFH projects predominantly cater to middle-aged households and families in suburban areas. Rapid growth of SFH projects illustrates evolution within the BTR market, as it expands beyond its original, urban roots. Amid skyrocketing demand and a housing affordability crisis, private equity and pension firms have spent record amounts (opens a new window) on buying or building SFH in the UK — deploying £1.9 billion in 2023, and £1.5 billion in the first three quarters of 2024.
Investors are attracted to SFH projects for numerous reasons, such as the ease of building SFHs within the UK’s planning system compared to other forms of accommodation. Additionally, the stability of typical, dual-income SFH tenants is appealing. SFH renters also remain in their homes for longer periods than other renters due to various influences, such as their children attending local schools or sports teams.
As SFH renters are typically young families, they will place a great emphasis on the amenities of projects. Ensuring developments have useful amenities can be a key differentiator when attracting tenants.
Selecting appropriate amenities
Typically, BTR tenants would expect a communal residence space, such as a terrace or lounge. However, since the pandemic, as more workers are working from home in remote or hybrid roles, co-working areas have become a necessity for BTR projects. For SFH specifically, both electric car charging points and built in wardrobes are commonly requested.
Renters also appreciate concierge services, particularly for handling tenants’ parcels and mail. It is important that projects appeal to prospective renters and enhanced concierge services could act as a “key point of differentiation” between BTR developments. While historically a gym was seen as desirable, novel installations, such as a padel court, can help properties stand out.
Embracing new tech can also bring benefits to tenants. Introducing an app or online channel to report facility issues — such as leaking pipes or broadband connectivity — can eliminate previous burdens endured by facilities managers. However, before automating back of house functions, it is essential tech is futureproofed to ensure its continued relevance and practicality — an issue especially important within purpose-built student accommodation.
Purpose-built student accommodation (PBSA) opportunities
Within the PBSA segment, repositioning older stock is set to become an increasingly important topic in coming years. Approximately 65% of PBSA stock (opens a new window) was built pre-2012 — which has created a clear two-tier market regarding accommodation quality. However, while vast amounts of PBSA is “ripe for modernisation”, this will require developers to futureproof investments by enacting required upgrades. Alternatively, buying land and building from scratch could be an attractive option — rather than securing planning permission for the renovation of existing buildings.
As existing PBSA asset holders may not have the necessary provisions for upgrades, experienced, seasoned investors may be able to buy stock from such proprietors at an attractive discount. Overall, the current valuation of assets is beginning to “reflect future requirements” for remediation to make buildings compliant.
The PBSA market also provides opportunity beyond the UK. Spain may be a good example of this, with some market participants perceiving it as “undersupplied”. However, investors must conduct thorough research on demographics and growth prospects before venturing into different jurisdictions. The possibilities of Spain are not necessarily replicated in its European counterparts, with “lower yields” experienced currently in France and Germany, and Nordic countries being arguably “harder to scale”.
For further information, please visit our Living Sectors page (opens a new window) or contact a member of the team.
