build-to-rent stamp duty

Build-to-rent value to hit £100bn as tenants’ demands change

As the number of tenants seeking good quality rental homes continues to rise, build-to-rent could be set to plug the gap in traditional buy-to-let.

Build-to-rent has developed from being an up-and-coming niche, arriving in the UK following on from similar trends in the likes of US, to an increasingly mainstream option for tenants looking for ‘something extra’ from their rental accommodation.

This has coincided with an ongoing growth in demand in the private rented sector, exacerbated by some buy-to-let landlords leaving the market or switching to short-term lets during Covid, as well as more first-time buyers delaying their purchase due to the current economic situation.

A new report released by Knight Frank predicts that the build-to-rent market is set to reach £102bn in total value by 2028. The report reveals that, between 2019 and 2022, the sector has already boomed by 60%, from £35bn to £56bn, demonstrating the intense acceleration of the industry.

Build-to-rent thrived through 2022

Despite the macroeconomic backdrop facing the country over the course of this year, investors in the build-to-rent sector have remained committed. According to the report, a huge £3.2bn was invested into the sector between Q1 and Q3 2022, while £650m more is predicted to trade by the end of the year.

Knight Frank points out that if the market does hit this level of £3.8bn total investment for the year, this will be 31% higher than the long-term average between 2016 and 2020.

While the value of trading in build-to-rent is expected to be considerably lower in the final quarter of the year based on the current pipeline, this is relatively unsurprising given how the year has panned out, as well as the natural slowdown in investment that can often happen towards the end of the year.

Interestingly, the biggest source of overseas investment into build-to-rent came from North America, with 28% of total capital invested coming from the country. The recent fall of the pound has left exchange rates very much in the favour of US investors, which could be behind this.

Just less than a quarter (23%) of foreign investment into the sector came from Europe, while only 2% of investment came from Asia Pacific. Meanwhile, UK investors made up 42% of the capital.

Rental market is robust

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.”

Rental prices across the whole private rented sector have continued to climb throughout recent years, while the number of tenants looking for accommodation far outweighs the number of properties available.

As more build-to-rent properties pop up, this could decrease pressure on the market, while generally offering a higher-end alternative to tenants, which is increasingly sought-after from those renters who want to be part of a community, and pay extra for additional amenities and facilities.

Growing in number

Knight Frank’s report shows that there are more than 72,000 build-to-rent homes complete and up-and-running across the UK, spready across schemes of 75 units or more. But there are also 57,000 units under construction, while 61,000 have full planning permission; making 190,000 in total in the pipeline.

This demonstrates the sheer scope for growth in the sector, with almost a quarter (24%) of local authorities across the country now having at least one build-to-rent scheme operational.

Oliver Knight, Head of Residential Development Research at Knight Frank, said: “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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