As tenants in the UK’s private rented sector continue to outnumber the properties available in the rental market, growth in the build-to-rent sector is plugging the gap.
Investors and builders in the burgeoning build-to-rent sector have been capitalising on the constant need for more homes from tenants, and the latest report from Savills shows investment has jumped compared with last year.
In the third quarter of 2024, £800m of investment activity in this segment of the rental market was recorded, which is the second highest Q3 investment of the last four years. This comes alongside record levels of completions, which have risen by a huge 23% nationally compared with last year – the number of completed homes in the sector now stands at more than 120,000.
Including properties in the planning pipeline and those already under construction for the rental market, this brings the total size of the sector to 274,000, according to Savills, although the construction pipeline has shrunk by around 20% in the last 12 months as the number of new starts has not been as strong.
While it still remains a relatively small part of the overall rental market, the scales are tipping towards professionalisation of the sector, with tenants increasingly seeking homes with extra amenities designed with renters in mind. They sometimes come with longer contracts, adding stability to the tenant.
Although the build-to-rent market tends to be the preserve of institutional investors rather than individual ones, some of the trends within it can be reflected onto the wider rental market, giving buy-to-let landlords an idea of what today’s tenants are looking for. Newly built, energy efficient homes in top locations with added extras for residents can attract a greater number of tenants, and therefore higher rents.
What type of homes are investors seeking?
Reflective of the changing desires of tenants, investors in the build-to-rent sector have also shifted in the property types they are most interested in.
According to Savills, some of the key criteria investors are now looking for include smaller units that “appeal to the typical rental demographic”, alongside sustainability features such as electric vehicle charging and heat pumps, as well as nearby amenities that tenants can easily access.
The report adds: “Delivering this requires housebuilders to form a pre-planning strategy for SFH, to differentiate these homes from open market sale homes and improve the viability of mixed tenure developments.”
Numerous reports have shown that tenants are increasingly prioritising energy efficiency in their homes, particularly as energy bills have soared over recent years. Across the rental market as a whole, this means investors who own top EPC-rated properties are likely to see them increase in popularity, while the lowest rates homes may begin to see greater price disparities.
A long-term commitment
Savills’ report notes that there are signs of a long-term commitment to the sector from investors, with housebuilders restructuring their business models to establish a private rented sector partnership model to work with investors. It also expects the sales market to strengthen alongside falling interest rates, which are expected to be brought down as low as 2.75% by the end of next year.
In the wider rental sector, these falling interest rates could also attract more buy-to-let investors, despite the recent news that the stamp duty supplement has risen from 3% to 5% for additional property purchases (affecting second home-buyers and property investors). The strength of demand in the rental sector is largely expected to outweigh the additional cost over the long-term.
According to Savills, while there has been a recent increase in bulk deal investment (involving institutional investors buying multiple sites at once), this could reduce as interest rates fall, enticing a higher number of smaller investors backing single-site developments.
In the rental market as a whole, the greatest returns are often made for those investors who commit to the long-term, who benefit from both the annual rental yields as well as greater capital appreciation from holding onto the property for a longer time frame.
If you’re a buy-to-let investor looking to capitalise on the huge rental growth in key areas across the UK, get in touch with BuyAssociation today and find out about our current and upcoming opportunities.
