10th January 2024
BTR Market Year-End Overview and Key Predictions for 2024

By Paul Belfield, Executive Director
A download of this article is available here

The popularity of Build to Rent (BTR) has been rising in recent years and, while still a relatively nascent market in the UK, it is coming into its own as a major real estate sub-sector.  In 2023, we launched our comprehensive BTR Research Report, looking at the market, highlighting the challenges faced and the opportunities, and setting the scene for what was set to be continued and steady growth. Eight months on, we look back at the market’s performance over the past twelve months and preview some of the key predictions for 2024. Covering everything from growth and investment trends, materials and labour insights and supply and demand dynamics, to key locations, the emerging popularity of single-family homes and the role of BTR in regeneration and enhancing ESG credentials, including sustainability and social value.

Growth trajectory

BTR has shown impressive resilience in the face of economic instability and wider industry challenges – inflation, interest rates at a 15-year high, the surging energy costs of last winter, supply chain issues, rising construction costs and labour shortages. Despite experiencing some slowdown in terms of project starts, the market achieved growth and, according to Savills, saw a record number of new BTR homes under construction in the third quarter of 2023, and completed homes up by 11%. Looking ahead, there is tremendous potential for ongoing growth, and Knight Frank forecasts the sector’s expansion to £126 billion by 2028 in the UK (from £70 billion today). 

Materials & labour

Construction material costs recorded an unprecedented increase on the back of the pandemic, Brexit, the Ukraine war, and subsequent energy price hikes. Now, better than expected inflation and stabilising interest rates mean that costs are easing; however, material prices remain over 40% higher than pre-Covid levels and this is likely to continue affecting developers and their contractors, potentially leading to more insolvencies – in the 12 months to Q1 2023, 4,165 construction firms entered administration (almost a fifth of all insolvencies). Rund research also highlights the industry’s labour shortage, with 7% fewer workers since 2019. These obstacles are impacting BTR but, going into 2024, we expect the market to settle. There are reasons for optimism, supported by continued investment and the sector’s ability to deliver a differentiated living experience.

Investment trends

Knight Frank’s Q3 2023 report shows £698 million of transactions in UK BTR in the quarter, pushing the year-to-date total to £2.7 billion. While like-for-like volumes are around 22% lower, investment remains relatively robust in a challenging macro environment and, looking at the bigger picture, BTR was down considerably less than other asset types, representing a record 10% of real estate investment in that nine month period. Regarding other trends, we are witnessing the due diligence process happening much earlier in the process and becoming a vital decision-making and risk management measure as investors and developers seek to future-proof developments. Additionally, while BTR remains a compelling investment proposition, the cost of debt is causing a shift in deal structuring. We also anticipate more activity in the secondary market and for JVs to grow in prominence this year, such as the recently formed BTR partnership between Grainger plc, Network Rail and Bloc Group.

Demand & supply dynamics

The UK’s severe housing crisis remains unabated. The Centre for Cities estimates that we face a deficit of over four million homes. If we fulfil the government’s target of building 300,000 per year, resolving the imbalance would still take half a century. The report stresses that increasing the amount of private housebuilding will be crucial – clearly we need to accelerate the delivery of professionally managed, high-quality new rental homes. Demand will continue to outweigh supply in the coming months, causing rents to rise even more. Findings from Cushman & Wakefield reveal that BTR rents in UK regions shot up by 9.3% in the last 12 months, with London increasing by 12%. Exploring the factors driving the demand, Rund’s report reiterates that, with fewer mortgages issued (due to affordability constraints), interest in rental properties is going up, and we’ll see more middle-income earners enter the space as they shy away from investing in a destabilised residential market. Apart from ownership challenges, society is generally evolving towards a more flexible rental model (for everything from homes and cars to phones, entertainment subscriptions and even clothes). This will become even more evident across the key property choices that individuals make throughout their life – from student housing, to BTR and then to later living. In fact, the living sector will provide the largest opportunity in the coming years, according to JLL.

Single-family homes

Our report highlights single-family BTR homes (SFH) as an area of substantial growth, as priorities shift from urban flats to suburban developments. There are now over 20,000 SFH homes complete or in the planning pipeline, and 71% of investors want to enter the sector within the next five years. The British Property Federation notes that the rise of SFH has resulted in BTR expanding into new markets, as almost 50% of local authorities now include BTR in their pipelines. Growth will continue, as SFH is yet to reach its full potential. Among the schemes we’re involved in is Chilmington Green, Ashford, which includes both apartments and houses, encompassing both single-family and multi-family BTR homes.

Location, location, location

Savills finds that, on the back of the cost of debt and evolving regulations for second stair cores, starts in London stayed subdued into Q3 while the regions showed more resilience (boosted by growing numbers of SFH). Regardless, London and the South East are set to remain BTR hot spots, with investment also spreading to the Midlands, the North and Scotland. Rund is seeing promising demand in cities including Birmingham, Liverpool, Newcastle and Leeds, with Southampton and Bristol also emerging areas. We predict that these core regions will show signs of increased growth.

Catalyst for regeneration

It’s important to focus on the significant role BTR can – and will – play as an enabler of regeneration. For example, our team acted as project monitor, quantity surveyor and employer’s agent on The Barnum, a major BTR development in Nottingham that marked the first investment by Grainger plc in the city. This project will be a catalyst for transformative improvements and broader regeneration in the area while providing badly needed new rental homes. The social value element (the ‘S’ in ESG) is equally critical. BTR can be delivered at pace, with residents moving in immediately, working, living and spending in the local economy. This brings in new talent and gives confidence to further development, enhancement and placemaking. Community and wellbeing will be at the heart of developments more and more. 

Sustainability & responsibility

The BTR sector has an opportunity to make a huge difference in supporting the green agenda, fighting climate change and contributing to the race to net zero. The need to decarbonise our built environment will grow in urgency into next year and, with BTR on the ascendant, we have a responsibility to make a positive long-term impact. Investment decisions and asset value are intrinsically linked to better performing buildings, so it’s a win-win. Other encouraging steps of the past year lie in the regulatory domain, as the Renters’ (Reform) Bill was introduced to Parliament to improve standards for the UK’s rental market; and the Build to Rent Code of Practice is in development by the UKAA. The benefits of these will flow through into 2024.    

In conclusion, we see tremendous opportunities for the ongoing growth of BTR. Despite factors such as materials remaining at a higher level and continuing to impact developers and contractors, all signs point to the market settling in 2024. As we have seen before, the BTR sub-sector is well-placed to navigate the challenges of the wider market and demonstrate resilience. The housing crisis is not easing yet, intensifying the supply and demand imbalance, and there is a chance that rents might increase further as a result. Looking ahead, appetite for high quality rental properties will be high, and more middle-income earners will enter the space. SFH, in particular, will expand further, attracting more investors. Additional regional hotspots will emerge, where BTR will play a bigger part in kick-starting regeneration and driving long-term impact, with community and wellbeing rising higher up the agenda for new schemes. We’ll see positive regulatory progress that will be advantageous to the industry, while deal structures will evolve. Our team is currently consulting on schemes comprising close to 5,000 BTR units. It is one of the most exciting sectors that is revolutionising real estate and we believe that it will reach new heights in 2024 and beyond.

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Rund publishes Buld to Rent Research Report