The build-to-rent (BtR) sector has emerged as a vital component of the UK’s private rented sector (PRS), addressing the growing demand for quality rental housing. Characterised by professionally managed, purpose-built rental properties, BtR developments offer a solution to the housing challenges faced by urban populations. These properties are designed with renters in mind, featuring amenities such as communal spaces, gyms, and co-working areas, which cater to modern lifestyles.

Moreover, BtR schemes often prioritise energy efficiency and sustainability, aligning with broader environmental goals. Investors and developers in the BtR market are increasingly focusing on creating long-term, resilient housing solutions that meet the evolving needs of tenants, while offering a stable return on investment.

The rise of the BtR sector reflects a significant shift in the UK housing market, where flexibility and convenience are becoming more valued by a diverse range of renters – from young professionals to families. As the sector continues to grow, it’s poised to play an instrumental role in alleviating the pressure on the UK’s housing supply and improving the overall standard of rental accommodation.

The changing shape of the UK housing market

The UK’s housing market has undergone significant shifts in recent decades. Surprisingly for some, homeownership with a mortgage is no longer the dominant housing tenure. The PRS has been an incredibly important part of the housing market puzzle since the early 2000s, doubling in size from 10% to almost 20%. 

Naturally, headline figures can obscure the broader context, as the propensity to rent in urban areas is significantly higher than in rural regions. This is due to several factors including higher population density in urban areas, job opportunities and lifestyle preferences. This is clearly visible in London, where 32% of the population currently rents, significantly higher than the national average of 19%. At present, 85% of the UK population lives in urban locations and this is projected to grow by 5.5 million people over the next two decades to 90% [1]. This focuses the need to build housing where demand is at its greatest.

While the wider PRS will continue to play a crucial role in addressing the UK housing shortfall, tenants deserve better-quality, energy-efficient homes that offer certainty and put safety first. Analysis of the latest English Housing Survey data highlights that the current provision of private rental accommodation is poor. Of all forms of housing tenure, ‘non-decent’ homes were most prevalent in the PRS, where 21% (identified from the English Housing Survey) – or just over one million homes – were categorised as ‘non-decent’ [2] . This emphasises the clear opportunity open to Institutional Investors to provide modern purpose-built homes that provide the much needed quality housing supply that will strengthen local communities. 

This is becoming a more pressing issue and not only to ensure that tenants live in a safe environment. When the Renters’ Rights Bill gains approval, in England it will become a legal requirement that homes in the PRS meet a decent standard. The bill will also apply Awaab’s Law to the sector, which sets timescales within which landlords must make homes safe when they contain serious hazards. It also empowers tenants to challenge unsafe conditions [3]. 

Undoubtedly, there is a relationship between the age of stock within the PRS and the prevalence of ‘non-decent’ homes, with older accommodation more likely to fail decent home requirements. In England, almost a third – 31% or 1.5 million homes – of PRS dwellings were constructed before 1919. 

The same relationship can be observed when it comes to energy efficiency. The proportion of private-rented dwellings with A, B or C ratings increased from 24% of pre-1919 dwellings to 81% of post-1990 dwellings. At present, there are approximately 578,000 PRS dwellings (12% of the sector) with poor energy-efficiency ratings in the E, F or G category in England. Industry estimates suggest that by improving a dwelling’s energy-efficiency rating to band C, tenants could save a total of £284 per year. By improving the rating to band A – a rating that is more common in new, purpose-built rental accommodation – this would improve cost efficiencies even more.

Energy bills are a key consideration for residents and data clearly indicates that newer, purpose-built accommodation brings greater efficiency and an associated cost saving. 

Renting as a lifestyle choice

The decision to rent in the UK is influenced by multiple factors. Of course, high house prices relative to income levels and large deposit requirements are often cited as the main reason for the sector, but it’s more than that. Renting is often a choice for those looking for flexibility, and the option to live in desirable areas, particularly for the younger population in urban locations. Deciding to rent is often an aspirational decision for lifestyle reasons, not just solely driven by economic factors or house prices and the provision of BtR undoubtedly provides an attractive alternative to owning a property to increasingly squeezed middle earners. 

The rental market continues to serve a crucial role in providing housing for approximately 5.7 million households in the UK. It also remains a vital source of housing if the UK is to hit the new Government’s house-building targets. According to English Housing Survey data, 67% of 16-24-year-olds live in rental accommodation, with this figure closer to 40% for 25-34-year-olds. Yet, the rental sector has been demonised because of unscrupulous landlords and concerns over housing market volatility.

A dwindling number of private landlords

Despite the need for all tenures to help address housing needs in the UK, regulatory changes have resulted in a sell-off by smaller-scale landlords. More punitive tax policies, higher interest rates and, most recently, the increased Stamp Duty Land Tax (SDLT) surcharge levied on purchases of second homes in England and Northern Ireland, are resulting in dwellings being removed from the rental market. In fact, the number of landlords looking to sell their rental property over the last 12 months is at a record high of 53%, according to the National Residential Landlords Association (NRLA). Only 7% of landlords are looking to buy. 

Growth of the BtR sector

The key difference between the PRS and purpose-built, rental-only homes (the BtR sector), lies in the level of service provision and management. The PRS is a broad term encompassing all privately - owned rental properties. Service provision in PRS is generally minimal or non-existent, with tenants responsible for maintenance and repairs. BtR on the other hand is a far more specialised sector. It’s focused on purpose-built rented accommodation, which is held by investors for the long term and offers a more professional and tenant-focused approach. BtR is owned and managed by institutional investors, with a clear priority placed on the level of service provision. This includes:

It is our view that discerning renters will be drawn to rental homes where they are treated as customers as opposed to simply being tenants. There is a clear opportunity for investors and operators to differentiate themselves in the sector through their service proposition and their ability to foster a sense of community among renters while demonstrating a positive interactions with other local stakeholders. 

BtR is not new in the UK, but it’s fair to say that it’s in its infancy relative to other more established global markets. In fact, listings for the UK BtR sector have grown by 40% since 2018, while traditional rental listings have dropped 26% over the same period. While the PRS is losing small-scale, buy-to-let (BTL) landlords, the UK BtR sector continues to grow. 

The BtR sector is a small but growing component of the housing sector. According to Realyse data, there are now approximately 100,000 completed BtR units in the UK, accounting for 2% of the PRS in the UK. While the BtR sector remains in its infancy, tenant awareness and demand are growing. Tenants who have made enquiries before about BtR are four times more likely to enquire again in their next home search than those who have not enquired about BtR before, according to Homeviews.  Around 87% of respondents who had previously experienced BtR looked for it again, with building security, price, location and maintenance all featuring highly [4].  This suggests that brand awareness and loyalty are likely to play an increasing part in tenants’ decision-making as they select a new rental community.

The growth potential for the sector is vast, with the need for more housing across tenures most acute at a time when small-scale BTL landlords are leaving the market en masse. Looking at more established global markets provides a useful indication of the direction of travel for the UK. In Germany, institutionally-owned rental housing is approximately 30% of the PRS. The US is higher still at 37%. In order for the UK to reach just 10% market share, an additional 470,000 units would need to be developed. To reach the levels in Germany and the US, this figure would need to grow to between 1.6-2 million new units based on today’s undersupplied wider market.

Unlike these more established markets, development will continue to be the primary route-to-market for investors in the UK, given the small number of operational assets in existence at present. Using BtR in mixed-tenure developments vastly increases delivery rates and allows more new homes to be built at greater speed. 

The advantages of BtR

The BtR sector is becoming increasingly important for the UK housing market. BtR developments can help address housing shortages by increasing supply, especially in areas with high demand and limited housing stock. In addition, the need to improve housing standards has never been more pressing. With the addition of professional management – which ensures better maintenance, quicker response times to issues, more energy-efficient buildings, and a more reliable tenant experience – BtR can address a number of the shortfalls currently faced by the wider rental sector. However, something that is often overlooked is the importance of regenerating urban areas. By doing so, BtR developments create mixed-use vibrant communities, where residents feel a sense of belonging and call it home. It’s a new and fast-growing sector, with evidence clearly demonstrating that there are pull factors drawing residents to BtR. 

Housing provision and targets in the UK

Housing formed a critical component of the Labour Party’s pledges in the run-up to the the 2024 UK General election, setting a target to build 1.5 million new homes. Following the election, the Labour Government introduced a new methodology to determine housing needs and establish housing targets for local authorities throughout England. The outcome of this amendment has resulted in the target growing to just over 370,000 new homes per year. As a result of the new targets, 91% of councils are facing an increase in the required development of new homes. 

House building would need to increase by over 100% from current completion levels to reach this target over the next five years. We must go back to 1969-70 to find the last time 300,000 homes were built in England in a single year. At this time, local authorities accounted for 44% of housing completions, compared with 2% now – that is unlikely to increase. Fast forward over five decades and private enterprises now account for 75% of new housing, while cash-constrained housing associations account for 23%. To build 300,000 homes each year, the private sector would be required to build just over 200,000 new homes per year based on current building trends. This is an exceptionally tall order based on current construction and absorption rates. While the ambitions of the new Government’s housing targets are welcomed, this is an exceptionally tall order based on current construction and absorption rates, which means there is a risk, the supply and demand imbalance remains. 

To effectively address the current housing shortage in the UK, integrating BtR into local plans must be mandated. This strategic approach involves careful planning around rental demand, ensuring developments are strategically located and meet community needs. Mandating BtR in local plans would foster a coordinated effort to address the housing crisis, making BtR developments a key part of the housing supply chain rather than an afterthought.

The importance of institutional capital

Equally important is recognising the role of institutional capital in addressing the housing crisis. Traditionally, listed housebuilders have been seen as the primary solution, but this view overlooks the significant contributions of institutional investors in the BtR sector. These investors bring substantial financial resources and a commitment to long-term housing investments. Their involvement can accelerate BtR project development, ensuring a steady and sustainable supply of rental housing. For a holistic approach to the housing crisis, the Government must acknowledge and encourage the participation of institutional capital alongside traditional housebuilders. This dual approach can enhance housing supply, improve affordability, and create vibrant, sustainable communities.

Final thoughts…

The housing market in the UK has seen transformative changes in recent decades, with a notable shift since 2000 from traditional homeownership to the private rented sector. This evolution is driven not just by economic factors or housing prices, but also by lifestyle aspirations and flexibility. These factors will continue to bolster demand for future rental accommodation.
Characterised by professionally managed, purpose-built rental properties, new BtR developments offer a solution to the housing challenges faced by urban populations. These properties are designed with renters in mind, featuring amenities that cater to modern lifestyles.

The current provision of rental accommodation is not fit for purpose. It falls short in terms of safety and energy-efficiency standards, when compared with new, purpose-built residential accommodation. BtR is therefore an important piece in the housing puzzle.  

BtR developments are expected to play a vital role in meeting the UK’s housing targets, with institutional investors bridging the funding gap. By focusing on high-quality service provision and innovative rental solutions, the UK can address its housing challenges and create a more diverse and dynamic market that caters to the evolving needs of its population. These efforts will ultimately contribute to a sustainable and inclusive housing landscape.