Early investors in the fledgling UK BTR sector made a crucial bet: that demand for long-term, stable income would compensate them for taking on the risk of developing homes for rent. Those bets have started to pay off. Investment in stabilised, operational stock rose to almost £1,050 million in the year to September 2020, from a historic low of £360 million in 2019.

Deals such as AXA’s recent acquisition of Dolphin Square in London show that investors with a low cost of capital have significant appetite for stabilised portfolios of homes for rent.

As the current wave of BTR investors accumulate portfolios of stabilised assets, we anticipate a further shift in the balance of activity from forward funding deals towards operational stock. Disposing their operational portfolios (or parts of them) will provide those early investors with the capital they need to build the next wave of homes for rent across the UK. Within the next five years, we expect to see investors acquire large, aggregated operational BTR platforms, similar to what we saw recently in PBSA with Blackstone’s acquisition of iQ Student Housing and Unite’s purchase of Liberty Living in the student accommodation sector.

The next wave

As earlier rounds of BTR development reach stabilisation and maturity, investors are broadening their search to find the next set of opportunities. In particular, they are moving away from traditional BTR city-centre locations and looking to the suburbs.

Our analysis shows that the vast majority of BTR homes in the UK are flats, with houses making up just 12%. By contrast, nearly twice as many private renters (63%) live in houses compared to flats. Even accounting for BTR’s geographic skew towards London, this mismatch presents an untapped opportunity for early investors looking to capitalise on the nascent suburban or ‘single family’ model.

There is limited new build rental supply coming through in suburban markets, despite growing appetite amongst would-be investors who are now recognising that by shifting to single family, they can generate stable income returns without having to service several lift cores. Single family developments also offer easier access for maintenance than flats and require less communal amenity space, helping reduce operational costs further. With lower running costs, rents can be more affordable and so capture a greater share of the local market.

Suburban BTR developments are geared towards families and tend to operate with lower turnover because these households move less frequently. Nearly two thirds of suburban renters are aged over 40, which government data shows is the fastest-growing segment of the rental market. More than half of these households (56%) have children, which will impact on their ability to raise a deposit to purchase their first home. In addition, households in this age bracket, especially those at the upper end, could find it challenging to secure longer mortgages as they will be at or beyond retirement age by the end of a 25-year mortgage. Combined, these factors mean that many of these households are likely to be life-long renters and will be seeking longer tenancies.

All of this makes Suburban BTR an attractive proposition for investors seeking secure, long-term income streams and suggest it will become a key growth area for the sector.

What do we mean by scale?

In The Sky’s The Limit? in 2019, we estimated the UK’s BTR sector could make up a third of the private rented sector at full maturity, or 1.5 million homes. What does this mean for the scale of the investors operating in that market?

Some of the largest investors in rented homes in the UK are housing associations. The largest of these, such as Clarion Housing Group, own many tens of thousands of social and affordable rented homes, a scale that dwarfs even the largest BTR investors. However, there are almost 5 million privately rented households across the UK, compared to 2.3 million in social housing. That suggests there is the potential for the largest BTR investors to accumulate portfolios well in excess of 100,000 homes.

Looking to more established markets such as Germany and the USA provides further support for this view. The largest US investors own many tens of thousands of homes nationwide. The largest German investor, Vonovia, owns 363,500 rented homes in Germany alone, with further holdings in Austria and Switzerland. Its German portfolio alone is twice the size of the UK’s entire BTR pipeline.

Build to Rent is now emerging into the mainstream in the UK. As it continues to grow, investors will find plenty of opportunities to achieve similar large-scale portfolios as those in more mature markets.