UK’s BTR sector forecast to see value swell to over £100bn by 2028

Since 2019, the value of the UK’s Build to Rent market has already grown from £35bn to £56bn – a 60% rise. However, based on analysis of the BTR pipeline, this figure will almost double in size to £102bn by 2028 – representing an increase of 82%.

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Property Reporter
2nd December 2022
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Global property consultancy, Knight Frank, reports that £3.2 billion of capital has been committed to the UK’s BTR sector during the first three quarters of 2022, with a further £650 million expected to trade before the year ends. The firm adds that this would take full-year investment to £3.8 billion – 31% higher than the 2016-2020 long-term average.

Jonathan Stevenson, Head of Build to Rent Funding at Knight Frank, said: “Investors have been undeterred by a macroeconomic backdrop characterised by soaring inflation and rising interest rates. However, higher financing costs since September’s ‘mini budget’ mean we expect a slowdown in investment in the final three months of the year as some highly leveraged investors take a pause.

“That said, deals are still progressing. Investors are buoyed by the counter-cyclical qualities of the sector, which remains attractive thanks to the low volatility and robust resilience of the rental market in times of economic turbulence; the structural supply shortfall of rental homes and subsequent opportunity for scale; and growing tenant demand as more people rent for longer.”

Knight Frank says that 65% (£2.15 billion) of investment in 2022 has been from pension and insurance firms, with the remaining 35% of capital invested by a combination of propcos, REITS and private equity firms.

North America was the biggest source of overseas investment into the UK’s BTR sector in 2022 according to Knight Frank; the firm estimated that North America made up 28% of overall capital invested; Europe made up 23% of overseas investment, with Asia Pacific investors accounting for just 2%. Almost half (42%) of capital was invested by UK firms.

BTR delivery supported by rental growth

Analysing the UK’s growing BTR pipeline, Knight Frank has said the number of completed units has tripled over the last five years. There are more than 72,000 complete and operational BTR homes in schemes of 75 units or more across the UK. A further 57,000 units are currently under construction and an additional 61,000 have full planning permission granted. This brings the total BTR pipeline to 190,000 homes (excluding sites in pre-planning). According to Knight Frank, some 24% of local authorities now have at least one BTR scheme open and operational within their jurisdiction.

Even with a strong delivery pipeline, rental stock in the UK is still in short supply. There have been more than 260,000 buy-to-let mortgage redemptions over the last five years as private landlords look to exit the market. Meanwhile, unemployment is near record lows, the population continues to rise, wage growth remains strong, and access to mortgage finance is restricting owner occupation. This outlook is supporting rental growth.

BTR hotspots

As part of its analysis, Knight Frank has identified the UK’s high-growth markets with the potential to be BTR hotspots in the coming years. By analysing population growth projections over the next 10 years, the percentage of the population aged under 35, employment growth forecasts up to 2040, and over BTR market penetration, Knight Frank has been able to identify towns and cities which boast strong demand drivers but typically have small pipelines – presenting a strong case for development.

The firm has named Norwich, Peterborough, Cambridge, Ipswich, Stevenage, Chelmsford, Watford, Oxford, Windsor, Maidenhead, Bracknell Forest, Leatherhead, Woking Tunbridge Wells, Portsmouth and Exeter as emerging growth markets.

Oliver Knight, Head of Residential Development Research at Knight Frank, commented: “Prospects for rental growth will also be supported by the fact that the proportion of earnings spent on rent has been steadily declining in recent years and sits below the long-term average. The average renter spent 35% of their pre-tax income on rent in 2022, down from closer to 40% five years previously. For couples and sharers, this figure will be even lower. Whilst we expect our rents will moderate from current highs in 2023, we believe there is headroom in the market for a period of above-average rental growth.”

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