The Build to Rent (BtR) sector continues to build momentum in Scotland. The planning pipeline has grown 69% since Q1 2020 bringing the total headline figure to 12,245 homes. The sector remains nascent with just c.1,000 homes currently operational, yet there is potential for the sector to reach over 100,000 homes at full maturity. Intervention from the Scottish Government has settled since the introduction of the Private Rented Tenancy (PRT) leading to a more predictable regulatory environment that has subsequently begun to attract institutional capital.

Edinburgh and Glasgow leading the charge

Activity has largely focused on BtR apartments in Edinburgh and Glasgow which currently have 4,664 and 6,627 homes, respectively in their planning pipelines.

The pipeline in Edinburgh and Glasgow represents 6.7% and 10% of current PRS households, respectively. There is great capacity for growth given the pipelines in Manchester, Birmingham and Leeds represent 29.6%, 15.5% and 13.1% of current PRS households (Fig 1).

Further completions are expected in 2022. Moda Living’s The McEwan, located in Fountainbridge, launched in December and is currently leasing 476 BtR homes. Legal and General’s Buchanan Wharf is expected to complete in the coming months (324 homes).

Investor confidence remains strong in delivering BtR across Scotland’s core cities as evidenced by Get Living’s recent application for 823 BtR apartments near the Merchant City area of Glasgow. If approved, this would be Scotland’s largest BtR scheme.

Supply shortages push rental growth nationwide

New rental supply is welcome at a time where, at  a national level, the number of properties available to rent during Q4 2021 was 34% lower than the 2017-19 average. This has fuelled annual rental growth nationwide. Since March 2020, Edinburgh and Glasgow have seen rental growth of 4.6% and 15.5%, respectively, compared to average annualised growth of 4.6% and 3.3% from 2012 to 2019. Since March 2020, only Nottingham has seen rents grow faster than Glasgow among core cities (Fig 2). Demand rose throughout the pandemic as more people working in Edinburgh chose to live in Glasgow given the perception of no longer needing to commute five days a week.

What would scale look like?

BtR is clearly finding its feet in Scotland and can play an even greater role in national housing delivery. It can help to address nationwide shortages of rental stock and provide additional housing supply to help meet housing targets now Help to Buy Scotland has ended.

Recent Government figures suggest there are c. 325,000 privately renting households in Scotland (2020) with less than 1,000 living in homes provided by institutional landlords. We estimate that UK BtR could reach a third of the Private Rented Sector at full maturity. In Scotland, this would amount to c. 108,000 privately renting households assuming the size of the PRS remains static. 

Given just 12,245 homes are currently in the total planning pipeline, there remains considerable scope for growth nationwide.

What role can the Scottish Government play?

For BtR to reach maturity there will need to be considerable levels of investment from domestic and international investors. The Scottish Government can play an important role in facilitating this investment

In Scotland the Private Residential Tenancy (PRT) was introduced in 2017, replacing assured and short assured tenancy contracts. The aim of the legislation was to increase security of tenure for tenants and to restrict unbridled growth inter-tenancy.

While this has improved demand for rented housing, supply has diminished with c.45,000 homes lost between 2016 and 2020 according to Scottish Government data. More restrictive policies around evictions has led to fears of an increased risk of substantial rental arrears among Buy-to-Let landlords and has the potential to heap further pressure on a sector in need of new rental supply.

Improvements to tenant security has not had the same detrimental impact on new BtR supply and has not deterred investment from large institution backed investors. This is because BtR landlords are aligned with many of the principles the legislation has sought to introduce: to attract tenants for the long-term, build communities that maintain high occupancy rates and minimise voids. 

But added uncertainty surrounding future rental market policies may also lead to a perception of added risk for investors and place Scotland at a competitive disadvantage internationally. Maintaining a predictable regulatory environment is therefore key to attracting new investment and supporting a sector in need of new homes to rent.

UK Build to Rent Investment

A record £1.6bn was invested into UK Build to Rent in Q1 2022, the highest number recorded for a first quarter. This breaks the previous record of £1.2bn recorded this time last year. Forward funding transactions made up 75% of investment flowing into the sector and remain a vital route to market as the sector matures. 

During Q1, a number of forward funds were completed for ‘regeneration leases’ with local authorities. This type of structure has seen local authorities supporting  regeneration in areas such as the Wirral, Barking and Dagenham and Milton Keynes unlocking stalled developments and facilitating the delivery of new homes.

Such transaction structures are attractive to investors whom are granted access to long-term, inflation linked income. This is particularly attractive for those with long-term liabilities such as pension funds. 

We may see this strategy grow in popularity where local councils are looking to participate in the delivery of BtR.

UK Build to Rent Development

The UK’s BtR stock now stands at 72,700 completed homes with a further 46,300 homes under construction. The future pipeline currently stands at 106,400 homes, including those in the pre-application stage. This brings the total size of the sector to 225,400 homes completed or in development.

Regional new home starts have driven the construction pipeline over the past few years and reached record levels in 2021. The 12,000 homes starting in the Regions in the year to Q1 2022 is 25% above the 2017-19 average, showing the destination of travel since the pandemic began. 

Growth has been particularly strong for Suburban or Single Family BtR. The total planning pipeline for this segment of the market has grown to reach 18,000 homes, an increase of 38% over the past 12 months. 

Throughout 2021, many investors announced aspirations to accumulate large portfolios of Single Family housing recognising the huge potential of the sector. This includes domestic financial institutions such as Lloyds Bank, Aviva and L&G as well as international heavyweights such as Goldman Sachs (US) and Blackstone (US).