But with a raft of tax and regulatory changes impacting the sector, what next for the rental market as landlords seek to protect yields and developers struggle to provide truly affordable housing? Judging by last year’s performance, the build-to-rent market is set to be a big part of the solution.
By the end of Q3 2018, 131,855 build-to-rent units had either been completed or were in the planning stage, according to figures from the British Property Federation, while Knight Frank predicted that investment in build-to-rent properties could reach £50bn by 2020.
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Constructing purpose-built rental homes has been popular in a number of countries for decades, but in the UK it’s a relatively new phenomenon due to home ownership being a key aspiration for Britons and with landlords historically preferring to invest in existing housing stock or converting existing buildings. However, the launch of the government’s Build to Rent fund in 2014 helped to kick-start construction of such schemes and to shift perceptions.
Demographic factors are also at play. Student accommodation has improved significantly in recent years with the addition of amenities such as contemporary communal areas, gyms and even cinema rooms. As a consequence, graduates are looking for higher-quality rental accommodation as they enter the workplace, with features and facilities they have grown accustomed to while studying. Unfortunately, it’s rarely possible to cost-effectively convert a Victorian semi into a contemporary HMO that offers these luxuries. Thirty brand new units in a purpose-built block is often simpler to build and more attractive to the tenant.
The benefits to investors and renters are clear. But while build-to-rent is increasingly attractive, investors should not fool themselves into thinking it’s a risk-free route into the market. As with any property investment, there are critical things to consider before committing to a scheme:
- Location: Build-to-rent developments are especially effective in larger, densely populated cities where there is good infrastructure, plenty of employment and where housing is at a premium.
- Design: Tenant expectations are increasingly high, so to maximise occupancy and rental income the design, facilities and features on offer must meet those expectations.
- Speed: Less time on site during construction means rent can be collected quicker, which is why modular and other off-site construction techniques are popular in this sector.
- Performance: Energy efficiency and reduced maintenance overheads will greatly boost net operating income, so improved building performance is key.
- Competition: Local planning portals will show other schemes in the area that could impact a scheme’s ability to let units.
The economics of build-to-rent are complex and the sector is still relatively immature. But with a thoughtful approach to every new scheme and the right bank support, build-to-rent can deliver for the developer, the tenant and the local economy.