Build to rent in a traditionally build to sell world

The upheaval caused by both Brexit and the COVID pandemic over the last few years led to huge amounts of turmoil across the UK. We have seen logistics and supply chain disruptions, raw material price rises, and increasing import and energy costs, indirectly leading to households rethinking their current living situations, and o ces altering their work practices. Across the property market, this meant that the period between early 2020 and early 2022 saw somewhat of a ‘great migration’ as nearly 3 million homeowners re-evaluated their living situations, took advantage of the greater ease of commuting and working from home, and moved house.

Naturally though, the rate at which people were moving was matched by the strong rate of house price growth. Between early 2020 and the summer of 2022 the average UK house price increased by 23%, equivalent to an additional £52,000 to the cost of buying a house. It is in this environment that house buying becomes ever more una ordable to the average buyer, and particularly first-time buyers. As seen previously during the most recent a ordability crisis in the late 2000s, this usually means a flight to the private rented sector: between 2009 and 2019 an additional 1.5 million households entered this sector. The average a ordability ratio in England and Wales is now 8.93, up from 7.73 just three years prior, and with rising mortgage rates and increasing deposits as house prices grow it is clear that we will continue to see a move to private rented accommodation.

But there are issues within this sector too – it has long been dominated by private landlords often owning one or a small handful of properties, meaning that it has been very disjointed, sporadic, and inconsistent with its provision across the country. Additionally, over the last five or so years it has been experiencing an issue with falling supply, as legislation and tax changes have made it increasingly unpopular with private landlords.

This does not look set to change much. For example, new EPC rating regulations are planned to take e ect in 2025, meaning that all private rented accommodation will need to have a certification rating of C or above to ensure that homes are more energy e cient. Current regulations are set at an EPC rating of E or above, and with the older age of many properties in the UK, this will have a significant impact on the sector. For private landlords in particular this will be costly and could run into the thousands to replace boilers, windows, and insulation to improve the e ciency of the home, and inevitably forcing many of them to sell.

The new Rental Reform White Paper is also bound to further reduce the number of private landlords as it again imposes further restrictions on landlords: to whom and when they can terminate tenancies, periodic tenancies, pets as a right, etc. and these new measures will again almost certainly trigger more landlords to leave the sector.

The supply and demand imbalance in the sector had already made it an ideal environment for the emergence of the investor-led, institutional-driven build to rent market over the last 10 years and these kinds of new measures will only further enable this. Not only has it been a popular asset class with investors and funds due to the long-income stream and cash flow attraction, but the modern, new build nature of the industry means that they already comply with the new standards and regulations. The average private landlord will have to compete. What’s more, professional investors are used to operating in these very tightly regulated environments and will have no problems manoeuvring around the incoming rental reforms.

This is also not to mention that the sector has also been exceptionally wellliked by tenants: the single point of management contact, surety of tenure, flexibility, abundance of amenities and the modern, energy e ciency of the buildings themselves have made it a popular choice in the UK lettings market.

So what next for build to rent?

New regulations and measures that are set to be put in place over the coming years will certainly change the shape of the private rented sector. However, it will not simply be government-led initiatives that shape the market: rapidly rising environmental awareness, energy e ciencies, social awareness, and wider cost measures and how to reduce them will all impact how the sub-sector operates. The lettings market traditionally attracts a younger demographic and therefore respectful, strong environmental and moral credentials will be key priorities for this traditionally forward-thinking, conscientious group.

As environmental and sustainable practices become ever more important within live and work settings (not least because of the rising cost of gas and electricity) and tenants seek to become more environmentally friendly they will then look to live in properties which match their values, and these are more often than not found in the build to rent model where stronger environmental, social and governance (ESG) credentials are naturally and more easily met.

There are some clearly visible and easily understood ESG measures within a build to rent development or scheme. Car charging points, secure bike lockups, high EPC ratings, and community meeting areas are all examples of this, and they will soon become even more important for tenants. However, over the longer term ESG measures in the way in which the buildings themselves are built and how they operate will rise in significance; consumers and tenants are becoming more educated about both the well-being of the local and global environment and also of their own well-being and how their surroundings can impact this.

There are many further measures where a build to rent scheme can enhance all of these aspects. They are much easier to achieve in these types of cohesive, institutional-led developments than in the private landlord-led model and even more than in the build to sell sector. Some measures include: -

• Carbon-neutral builds – greenhouse gases are minimised at all stages from the manufacturing stage to the final use stage.

• Modern methods of construction (MMC) or modular builds – a timelier, energy and cost-e cient alternative to traditional building methods using digital technology.

• Heat pumps – ground or air source heat pumps which rely on electricity are alternative heating systems to the traditional boiler method which relies on gas.

• Green walls – plants growing along the walls are great for urban schemes where there may not be large spaces for gardens, reducing the carbon footprint and adding extra insulation to reduce noise levels.

• Social value and social impact – the BTR sector adds social value for the tenant experience by way of communal areas and through creating neighbourhoods and communities. In many cases the local BTR units will have a community space and social media groups that can get together in the communal areas both indoors and out. However, going forward the sector can aim to do this through the whole build process as well, through contractor collaboration, mentorship, and attention to the health and wellbeing of builders and contractors across the whole build cycle.

In summary, many of the incoming regulations and legislation are bound to reduce the overall available supply of stock in the private rented sector. Private landlords and investors will undoubtedly find some of these regulations prohibitively expensive, unachievable, and too onerous to reach a sound investment or return. This will leave a gap in supply creating an opportunity for the BTR sector as tenant demand will continue. Nevertheless, new legislation, regulations, local and global environmental concerns are going to lead build to rent into new territory.