Unlocking the future of UK build-to-rent

Many of the contents of this article were originally raised at a seminar and panel discussion event entitled ‘BtR: What’s in Store for 2024?’, hosted by Lockton Global Real Estate & Construction on Wednesday 7th February.

The Build-to-Rent (BtR) sector continues to grow apace in the UK, with rising demand for rental housing. This is good news for developers, but to break new ground in BtR first requires an ability to juggle persisting economic challenges, and to overcome significant resistance at local and national levels of government. In this context, a blueprint for success may lie in collaboration with sector partners, both to leverage support for BtR and refine a future model of best practice.

New ways of living

There is little doubting the growth of UK BtR. According to data from Savills, the sector received total investment of £4.5 bn in 2023 (opens a new window) – the second year highest on record, just c. £100m shy of 2022. What’s more, demand for BtR is expanding outside traditional hubs. London and Manchester play host to the UK’s most mature BtR markets, but cities including Birmingham, Belfast, and Leeds, among many others, were all active in 2023. Deals outside of London accounted for 77% of all investment in BtR last year (opens a new window).

The story of BtR reflects a shifting mentality around home ownership, with households increasingly choosing to rent, for reasons including a desire for a more flexible form of living. Particularly evident at the higher end of the market, this comes amid a period in which rents sit at an all-time high – and is reflective of a notable cultural shift, in which UK cities increasingly resemble more established rental markets in Europe, Asia, and the US.

Other factors are also contributing to BtR’s growth. Part of the legacy of the COVID-19 pandemic, a surplus of inner-city office space also presents new opportunities to repurpose former commercial centres (opens a new window) into long-term residential communities. With more leases still to expire – notably, HSBC’s exit from 8 Canada Square in 2027 – developers can be assured of a healthy supply of stock in the coming years.

Overcoming challenges to BtR development

Yet, realising ambitions for the wider BtR sector isn’t without its difficulties. Despite signs of inflationary easing within the economy, the cost of capital continues to play an important role in project viability, with high material and labour costs squeezing affordability for many developers. At the same time, residents in the lower quartiles of rents face increasing financial challenges, raising the risk of vacancies within operational assets.

Even with the optimum conditions in place for BtR delivery, breaking ground on new projects is a different matter altogether. The National Policy Planning Framework has included a definition for BtR since 2018, providing a platform for its delivery. Yet, inconsistencies remain in how Local Planning Authorities (LPAs) interpret the available guidance, with many reluctant to give BtR schemes the green light. Instead, the application of restriction planning policies, including ill-suited targets for affordable housing, has hamstrung new development.

This is particularly notable in London, where the criteria for BtR schemes are set out under the 2021 London Plan. According to a report by Lichfields (opens a new window), a planning and development consultancy, just 54% of London planning authorities make specific reference to BtR in their Local Plans. The same research identified two LPAs which have attempted to introduce policies which explicitly restrict or limit BtR: Islington and Kensington & Chelsea. In the case of the former, the Local Plan submission went as far as to state that the ‘purpose built Private Rented Sector development model does not have a role in meeting identified housing need’.

Predictably, driving the expansion of BtR schemes becomes more arduous in the absence of genuine support. Project timeframes inevitably take longer. Other regulatory obligations add further complexity, including targets for ESG and building safety. In the interim, the UK continues to grapple with a deficit between supply and demand, with a reported 1m new private-rented sector homes needed by 2030 (opens a new window), at a cost of £250bn.

Knowledge sharing – a blueprint for success in BtR

These are problems without straightforward solutions. More work is needed to bring clarity to the BtR proposition, and to articulate the sector’s potential when it comes to addressing the UK’s housing challenges; developers must be prepared to engage governmental figures at both a national and local level. At the same time, a focused operational strategy is essential when it comes to delivering BtR projects with long-term viability. To attract investment, developers will need to showcase an understanding of the sector’s core planning challenges, and the ability and experience to execute on their promises.

Nevertheless, BtR continues to foster internal momentum. Partnership between housebuilders and investors is an essential component in the pursuit of new developments – evidenced by the latest investment by sustainable living specialist Package Living and Aviva Investors (opens a new window) to forward-fund the creation of 174 new homes in Bordon, Hampshire. Similarly, the growth of sector-specific membership organisations such as the UK Apartment Association (UKAA) presents housebuilders with new opportunities for collaborative learning. Best practice guides (opens a new window) for a range of issues, including customer experience, ESG and risk management are already in circulation.

Government support may be in short supply, but public sentiment towards BtR continues to warm in line with the ever-improving quality of products on offer. The entrance of new players into the market is also driving competition; the success of future developments is likely to hinge on brands’ ability to appeal to residents’ needs and expectations, be it through the provision of amenities – from remote access systems to integrated technology and AI – or via an authentic commitment to delivering ESG and social value.

For information about risk mitigation and insurance solutions for BtR developments, click here (opens a new window) or contact:

Gregg Cordell, Senior Vice President, Lockton Global Real Estate and Construction

E: gregg.cordell@lockton.com (opens a new window)

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