COMMENT The opportunity for volume housebuilders to partner with institutional investors and increase their exposure to the UK’s suburban build-to-rent market is huge – and growing. There is £8bn of institutional capital ready to be committed to the suburban BTR housing market over the next five years by leading investors, and delivery partners are in short supply.
More than 60% of privately renting households in the UK live in houses rather than flats, but only 12% of completed, operational BTR stock is suburban housing. The remaining 88% is urban, flatted schemes.
As such, renter demand for suburban BTR schemes significantly outweighs supply – institutional investors are acutely aware of this fact and are keen to take advantage by partnering with housebuilders.
This imbalance has potential to grow considerably as some buy-to-let landlords exit the market owing to the rising cost of mortgages, the erosion of capital gains tax allowances and changes to EPC requirements. Accordingly, some private landlords are struggling to make their buy-to-let investments viable. This is leaving renters with less choice and lack of supply; competition for private rental properties and rising rents means more tenants turning to BTR.
As tenants seek affordable, high-quality, long-term rental options in suburban locations, investors grow ever more hungry to deploy their capital and tap into this growing renter demand.
Delivery benefits
Partnerships between housebuilders, developers and investors will drive increased delivery of new rental homes across suburban markets over the coming years, and for housebuilders willing to partner, there are clear benefits.
Firstly, the forward-fund/commit nature of most suburban BTR deals helps de-risk projects in a fluctuating sales market, while the non-competing nature of rental and sales products can help shorten development timeframes and release areas for development ahead of a sales delivery strategy.
There is the ability to improve massing on suburban BTR sites, while a fully let rental product integrated within a wider development can assist in early marketing by creating a lively community.
For a housebuilder considering partnering with an investor and introducing a suburban BTR element into their traditional “for sale” scheme, there are some fundamentals to consider.
Suburban BTR investors typically target schemes that deliver a high proportion of two- and three-bedroom houses and a small proportion of four-bedroom houses. Our experience suggests that schemes broadly adopting a 90% exposure to two- and three-bed houses are most appealing to institutional investors.
Furthermore, optimised unit sizes is key; in contradiction to the traditional sales market, rental value in suburban BTR schemes is largely driven by the number of beds and not by size of unit.
Schemes with the appropriate unit mix and optimised sizes will not only attract the strongest rental demand but the delivery of these units will assist in driving investment value and delivering operational efficiencies – all key factors for any institutional BTR investor.
Lifetime renters
But achieving the right unit size and unit mix will not be enough – as well as appealing to institutional investors, schemes must also appeal to renters to ensure they can compete on the open market and keep occupancy levels high. An understanding of how the UK’s renting population is constructed and what tenants look for is essential.
Our analysis suggests that more people than ever are now likely to rent throughout their lifetime. The number of privately renting households aged between 35 and 44 has increased to 27% from 17% a decade ago. Households aged over 35 are now the fastest-growing group of private renters in the UK – naturally, this trend means that the number of private renters with children is also increasing. Families with children now account for 36% of all households living in the private rented sector.
As people grow older and their lifestyles change, so do their accommodation needs. The key attractions for suburban renters aged between 35 and 44 are typically schemes that are located close to local amenities and good schools, and within easy reach of employment hubs. Housebuilders should consider whether their scheme meets these requirements if they want to attract investors and explore diversifying into suburban BTR.
In the current climate, historic sales strategies may need to be adapted to not only suit the market landscape but also tenant demand. Considering a diversified strategy which includes a mix of for-sale and rental options will ensure housebuilders can ride the wave of economic uncertainty, benefiting from the burgeoning institutional investor demand looking for secure, long-term income streams that also meets the demand of today’s renting population.
Jack Hutchinson is an associate, residential investments, at Knight Frank
