Ahead of the Build to Rent UK Conference on 27th November, we caught up with Richard Donnell, Executive Director of Zoopla, to discuss what the new Government and the current economy means for Build to Rent and Housing
Q: What does the new Government mean for Housing Delivery and where does Build to Rent fit?
It is positive that the Government is committed to building more homes and is starting with reforms to the planning system, more funding and more planners. This should be seen as just the start as there is much more to do to support housing delivery across all tenures.
I am less sure how much the Government and senior policy makers appreciate the fact that the cross-subsidy model of development is struggling to support delivery. Viability is a big barrier to growing supply and more targeted funding and support is needed.
Building more homes and sustaining higher output needs steady and predictable sources of demand. Corporate investors buying homes to rent out is a key source of demand for homes in future as well as housing providers buying affordable homes and private home buyers.
Q: How has the private rented sector changed in recent years, and what factors have driven this?
The private rented sector (PRS) in the UK doubled in size from 2000 to 2016, driven by private landlords buying homes to rent. Growth has stagnated since then with PRS stock levels static at c.5.5 million homes. Several factors contributed to this slowdown. Changes in tax policy, specifically those targeting buy-to-let landlords, and uncertainties like Brexit, followed by higher borrowing costs have all played a role.
During the pandemic, there was a notable drop in demand for rental properties, particularly in urban centres. However, as the economy reopened, demand surged, especially with the return of international students and workers. Despite the recent influx of renters, the stock of available rental properties has not increased, creating intense competition for housing and significant rental price increases averaging 30% over the last 3 years.
Q: How have higher mortgage and interest rates affected residential property investment?
Higher mortgage and interest rates have undoubtedly increased the risk and complexity for investors in residential property. These rate hikes have a direct impact on the return profile of BTR projects, making investment decisions more complicated. For developers, this means navigating a tougher landscape where the margins might shrink, and affordability becomes an issue, especially for first-time homebuyers who may now be priced out of home ownership.
On the flip side, this creates a stronger rental market as more individuals are compelled to rent, increasing demand for BTR properties. However, this also increases the need for developers to carefully evaluate the balance between private sales and rental housing to ensure project viability.
Q: What is the outlook for rent growth in the BTR sector?
Recent years have seen unprecedented rent growth, particularly in major cities like London. Between 2021 and 2023, rental prices surged by 30-35% in some areas. However, looking forward, many experts, including those in the BTR market, are urging caution. While the pandemic-induced surge may have bolstered rental yields for now, there are concerns that renters’ ability to continue absorbing rent increases is limited, particularly in London and other high-cost cities.
As a result, BTR investors and developers are advised to take a conservative approach, assuming rental growth will more likely track wage increases, which hover around 2.5-3% annually. The rapid upward reset in rents should be seen as a one off and long-term sustainability should be the core assumption for BTR investors.
Q: How does the BTR sector contribute to housing diversity and affordability?
While the BTR sector offers high-quality rental housing, it doesn't necessarily address the need for affordable or social housing. BTR developments are often built in prime urban locations, offering amenities that command higher rents. This makes them attractive to young professionals and middle-income earners but less so for lower-income households. That said, affordable housing requirements ensure that new delivery includes a range of rented tenures.
However, the BTR sector still plays an important role in the housing ecosystem by providing alternatives to home ownership. It helps professionalize the rental market, often raising standards and offering better-maintained properties with longer tenancies. For the sector to contribute meaningfully to housing affordability, it needs to operate alongside social and affordable housing developments, ensuring a broad range of rental options are available.
Q: What impact could the Renters’ Reform Bill and potential rent controls have on BTR?
The Renters’ Rights Bill currently progressing through Parliament introduces new regulations aimed at improving tenant rights, but it stops short of introducing rent controls, a policy that has caused concern in the investor community, particularly in Scotland. Rent control measures there have weakened investment and increased uncertainty as landlords have potential lost ability for rents to track the market over time. It seems likely that Scottish Government will reverse some of the proposals making Scotland more attractive to investors.
In contrast, England has avoided rental controls, which has kept investors relatively confident about the future of the BTR market. However, the Renters Rights Bill does push for higher standards across the rental market, focusing on improving conditions in substandard properties. This move toward regulation should benefit the BTR sector, which typically offers higher quality, professionally managed homes, thus positioning it as a key player in raising rental standards overall.
Q: How should BTR investors approach the market in the current climate?
BTR investors need to be both realistic and strategic. The recent surge in rents has been driven by a unique set of circumstances, including post-pandemic demand spikes, but this level of growth is unlikely to be sustainable in the long term. Investors should align their rental growth expectations with wage growth and consider diversifying their portfolios to different segments of the rental market. This includes exploring emerging opportunities like single-family rentals or entering secondary markets where there may be less saturation and more room for growth.
Additionally, investors must remain aware of regional market differences. What works in London may not be viable in Leeds or Liverpool, so understanding local demand and the regulatory landscape is crucial for success.