How Build-To-Rent Has Emerged As An Investment Option

Property has of course been an established investment option for many years, and it appeals to many different types of investors. This is mainly because different property markets open up and market fluctuations present investment options with varying levels of appeal.

Build-to-rent (BTR) is one of these property markets, and is a relatively new concept. It started to gain traction after the London Olympics of 2012 when the athlete’s accommodation in the Stratford East Village became a purpose-built rental property scheme as an important element of the games’ legacy. Since then, BTR has grown rapidly and over the last decade has developed to present an option which changes the poor perception of the rental market, by redefining the quality of the housing stock available to the rental sector as well as changing how these properties are managed.

The term ‘build-to-rent’ is self-explanatory, but how it is classified within its market sector and how it differs from traditional rental property is what identifies it as a new and exciting market. BTR is where purpose-built housing is designed and created especially for the rental market rather than to suit long-term housing ownership. Although BTR sits within the private rental sector it is different to traditional buy-to-let stock because schemes are usually owned by institutional investors or property companies, rather than by private landlords, even if they are professional, full-time landlords with a portfolio of maybe three or four properties. In most cases these are buy-to-let properties which are usually old properties reconfigured to maximise income for the landlord, whereas BTR properties are designed and built for the rental market with more quality and consideration, both for the tenants and wider communities.

In the UK, the rental market has increased in recent years as better quality properties have been created, and BTR has been a big influence on that. But also, a big reason for the success of BTR is that there is less housing stock available to buy, hence there is more demand for rental properties from people with high standards, people are more attracted to the flexible living parameters around BTR and things like Kwasi Kwarteng’s 2022 mini-budget have made mortgages even more unattainable for first-time buyers.

So if BTR properties are becoming so appealing in 2023, why is that?

Modern properties – BTR schemes create well-designed properties that are fitted to a higher specification and are well-furnished, and take into consideration smart building techniques.

Property management – BTR properties are operated by a professional management company, which often provides services such as laundry, concierge and security.

Community – There are usually communal hubs in BTR properties, such as shared dining spaces, outdoor spaces or communal roof terraces. These are designed to create a community feel and means people feel more connected and a sense of place, and hence may see the property as more of a long-term arrangement.

Long-term - BTR properties typically offer more long term tenancy agreements.

Amenities – BTR properties may offer grab & go breakfast facilities, a gym, a games room, a laundry room and parking facilities.

Essentially, BTR properties aim to become more than just a living space and also are looking after a tenant’s health and wellbeing. This sense of community also helps the long-term viability of the project for an investor, and therefore makes it more appealing.

BTR has changed the perception of the rental market and it has also emerged as a viable investment option for professional investors.

At the end of 2022 there were 74,000 professionally-managed BTR units in the UK, which is a 13% increase on 2021. And at the same time, private landlords are withdrawing from the buy-to-let sector, to some extent as a result of the BTR sector and a standard of quality and management that they can’t compete with. 

So what are the benefits of BTR for a professional investor?

Long-term investment – The investor can enjoy reliable income and long-term capital appreciation in a predictable and non-volatile market.

UK-wide availability – The BTR sector is strong in London, but Knight Frank reported a £2.35 billion investment in BTR in the first half of 2021, and 70% of that was in areas outside the capital

Big cities such as Bristol, Cardiff, Birmingham, Liverpool, Manchester and Leeds all have thriving BTR sectors. 

Resilient market sector – While BTR has grown hugely in the last decade it was also resilient through the pandemic. The 2021 figures reported above by Knight Frank were also an 80% increase on the same period of 2020, when the pandemic started. Furthermore, BTR schemes are designed to meet changing lifestyle trends for home-working needs, shared living and an availability of outdoor space.

Speed to market – Modular construction techniques mean schemes can be built and delivered to market very quickly, which matches how investment is targeted to this sector and also means schemes can react to employment clusters in regional areas to meet changing trends. 

Long-term viability – Creating an attachment between tenants and properties provides a long-term viability not normally associated with the rental sector, but the way BTR buildings are designed – using smart techniques, new technology and environmental sensitivity – also adds to their long-term appeal.

Growing tenant demand – Lifestyles are changing to meet the appeal of BTR schemes and the rental market is growing accordingly. In 2010 it was estimated there were 3.6 million people in the rental sector and by 2020 this had grown to 4.4 million. The continuing constraints on first-time buyers has also contributed to the increasing appeal of renting, but BTR is another enticing factor.

Future growth markets – Although the rise of BTR has been impressive, there is still untapped potential and parts of the market where demand hasn’t yet been filled. There could be more affordable rental options, such as mid-priced schemes to satisfy a big market demand, while more schemes geared towards families and the older demographic would also be plugging a rental gap and be recognised by investors as an attractive option.

What are the benefits of build-to-rent for renters? – Undoubtedly BTR schemes are designed with the tenant in mind and a more concentrated lifestyle demographic, which suits the tenant and means they have a high quality of living and their health and wellbeing is looked after. BTR schemes are also professionally managed, which means fair costs, good security and high standards. 

Longer-term stability – Because BTR schemes typically offer longer-term tenancy agreements, the tenant can enjoy a sense of stability not usually found in the rental market. 

Flexible designs – While the target demographic for BTR has traditionally been the 25-34 age-group of young professionals, increasingly BTR schemes are also adapting to the needs of older age groups, house-sharing groups and families, although as mentioned above, there is still plenty of scope for this area of the market to be improved.

Better local communities – In addition to the communal aspect of the property itself, BTR schemes also help to regenerate local areas. They provide community space, but also improve environmental landscaping (planting trees and creating green spaces) and provide commercial spaces such as cafes, bars, gyms etc that are associated with the BTR property.

How do people invest in build-to-rent?

Investing in property is appealing to different types of investor. Property investment works for someone trying to build a decent pension pot with a single property, it works for the full-time BTL landlord who operates a small portfolio of properties and it works for the professional investor.

Property investment is:

Reliable – a predictable and non-volatile investment market

Low-risk – you can spread your risk across a number of different property types

Long-term – passive investments which will likely appreciate in value

Outpaces inflation – property typically rises in value much faster than inflation meaning your invested money is working for you.

Pensions are a type of investment which needs prudent management for obvious reasons, namely to ensure that eligible retiring employees see the financial growth and return they are expecting. For many years there has been a limited market for pension investments, which has typically focused on Government securities and Blue Chip stocks. But increasingly we are seeing pension funds being invested in more asset classes, such as private equity and property. 

Passive investments in property such as the BTR sector, are usually made through trusts or private equity pools, and they can include commercial properties (offices, industrial or retail parks). But BTR schemes are ideal because they can help create a portfolio of properties and an appreciation of equity which brings an inflation-adjusted income. And as we know, this is vital in helping the professional investor ride out the peaks and troughs of the property market.

In addition to pension funds, mutual funds are a financial vehicle through which shareholders (i.e. a group of investors) pool their assets to invest in securities. Traditionally this has been stocks and shares, but increasingly, mutual funds investors are being attracted to property investments such as BTR schemes. As a common investment objective, BTR schemes are modern, appealing and hold a long-term viability, so it is easy to see how they have emerged as a target for the professional investor.