COMMENT Economic data released so far this year has been remarkably positive. Unemployment remains low and GDP is growing. Yet despite this surprisingly upbeat macro backdrop, challenges remain. The cost of debt is weighing on sentiment and spending, while inflation – although easing – remains in double digits.
With this mixed outlook, build-to-rent investors may be asking themselves if it is unrealistic to expect the sector to see sustained rental growth in the medium term given the current economic climate.
The short answer is “no” – despite economic headwinds and the ongoing cost-of-living crisis, we have good reason to believe the BTR sector will see robust rental growth over the next few years.
Sheltered renters
One of the main reasons for this is that rent, as a proportion of average income, has reduced over the past five years – supported in part by sustained wage growth. Earlier this year, the Office for National Statistics released new data which showed that between June and August 2022, the growth in average total pay was 6% – the strongest growth in regular pay seen at any time outside of the Covid-19 pandemic.
Our own research supports this. Five years ago, nearly 40% of a person’s average net salary was spent on rent. However, in 2022, because of ongoing wage growth, the proportion of a person’s net salary spent on rent had fallen to 35%. This has created headroom for renters, whereby even if rents rise in the medium term, this will be offset by rising wages and rent as a proportion of total income will likely not rise above 2017 levels.
Another reason we can expect to see rental growth in the urban flatted space is that, while bills are rising for average renters and homeowners, those living in a BTR scheme are somewhat insulated from the recent inflationary surge of oil, gas and electricity prices. Most BTR schemes are new-build, which must adhere to strict building regulations, and many are being built to surpass minimum standards.
While BTR tenants will see bills increase, they should be more shielded from any increase. So, while BTR tenants may see rents rise, the nature of more energy-efficient new-build stock means bills will remain relatively affordable when compared to those buying or renting second-hand stock.
Headwinds on the horizon
When considering future rental growth potential, it is also crucial to look at the long-term performance of residential rents across the UK.
Residential rents have shown highly consistent growth over the past 50 years or so, including through periods of economic volatility and recession. Indeed, based on historical performance, rents have often outperformed during recessionary periods as prospective buyers chose to rent until stability returned to the market.
Finally, we are in a high interest rate environment. It has been well-documented that the era of ultra-low mortgage costs is over, as the Bank of England continues to hike up interest rates to try and limit rising inflation.
The average mortgage for a new borrower now costs £1,298 per month, up 68% from £771 at the end of 2021. As well as putting pressure on pricing in the sales market, this increase will frustrate many aspiring first-time buyers.
Rental growth has been steady over the past three years but BTR residents have not seen huge rises in the way those taking out a new mortgage or remortgaging have. Therefore, even if rents grow by around 20% CAGR in the BTR space over the next five years, it still would not match mortgage increases.
What these key metrics indicate is that, while economic headwinds are on the horizon, investors can still expect to see strong medium-term rental growth while crucially maintaining affordability in relative terms for renters of BTR.
Nick Pleydell-Bouverie is head of residential investment agency at Knight Frank
