Within a decade, the UK population is forecast to grow by 1.8 million people - a 2.7% increase. Meanwhile, the size of the average household is declining, and there remains a meaningful structural undersupply of affordable homes. Without rapid action from private investors, the UK’s housing crisis could worsen significantly over the coming years.
However, the advent of build-to-rent (BTR) property in the UK – purpose-built, professionally managed housing designed for rent rather than sale – represents a significant step forward in tackling the crisis. While BTR has rightly witnessed rapid growth in recent years, we believe this is merely the start. Numerous powerful structural tailwinds support the asset class, and its runway for growth is expansive.
Demand for rent skyrockets
Although the UK has only adopted BTR in the past few years, the country still lags behind in terms of its provision. Only 2% of homes for rent in the UK are BTR, compared with 12% in the US, for example.
This is despite demand for rented property skyrocketing in recent years. Since 1997, UK property values have become increasingly unaffordable, rising from 3.5 times average earnings to 9.1 times. As such, the number of households renting has grown 93% in the last 15 years – compared with a mere 3% growth in owner-occupation. Moreover, the proportion of owner-occupiers remains among the highest in Western Europe at 65%, leaving plenty of room for further BTR expansion.
To meet the burgeoning demand for rentable accommodation, supply must accelerate – and fast. Yet, presently, the opposite is happening. Since Q1 2017, there have been more than 180,000 buy-to-let mortgage redemptions. The supply of units for rent is currently falling, most likely driven by mortgage tax changes that discourage private landlords.
Given the above, an institutional-led BTR revolution is erupting. A record £4.4bn was invested in the sector in 2021, and there is every indication 2022 will see a greater level of investment, despite the significant macroeconomic challenges affecting the cost of living and debt pricing. While this poses societal benefits, such as greater provision of high-quality, effectively managed, and amenity-rich housing combined with the flexibility of renting, it also represents a compelling opportunity for real estate investors.
Potential in residential
Exposure to residential property offers attractive diversification benefits, including cashflow reliability and exposure to a sector proven to be a long-term inflation hedge. While current high inflation is likely to erode the profitability of most commercial tenants and the ability for rents to grow, in the residential space, it is more likely to increase rental growth, as rising mortgage costs create more renters, while increasing build costs squeeze already limited supply.
For too long, institutional investors have shunned residential as too fragmented and management-intensive. But in doing so, they have foregone attractive returns. Since 1980, in real terms, the residential sector has returned an annual growth of 5% on capital and 2% on rents, compared with all property returns of -0.8% on capital and -0.3% on rents.
Given the long-term tailwinds supporting BTR, we recently made our first acquisition in the space, advising one of Swiss Life’s managed pan-European funds with the purchase of Duet, a modern 270-apartment block in Salford Quays, Manchester. Meanwhile, the Mayfair Capital-managed Property Income Trust for Charities is also making its first residential investments, constructing a nationwide portfolio of single-family houses.
Quality is king
Drawing on our experience operating in the broader residential sector, we devised a strict set of requirements that BTR property should meet, spanning environmental, locational, asset-specification and amenity credentials. As in every sector, long-term property investors can expect to generate resilient income returns through ownership of the highest-quality assets. Such assets meet customer expectations by offering the right specifications for occupiers, the physical flexibility to adapt to evolving occupier needs, and responsive service and facilities management.
Salford Quays is a well-connected and vibrant location, offering excellent demographics, transport, employment and amenities. It is just 15 minutes from Manchester city centre by tram, while also being on the doorstep of the rapidly expanding Media City development. The property offers well-proportioned one- and two-bed flats with attractive on-site amenities, including a gym, car park, garden, concierge, tenants’ lounge and meeting room – as well as waterside views over Salford Basin. Alongside London, Manchester is forging the way in BTR development, but despite boasting 92 schemes, it remains undersupplied.
Duet was completed in 2019, offering limited initial capital expenditure and strong long-term environmental credentials, validated by an EPC ‘B’ rating. Day-one cashflow was provided by a recently stabilised tenancy position, while income security comes from a well-run management team and excellent tenant reviews, being the highest-rated UK BTR scheme on online review site Home Views. Rents are well within reach of mass-market salaries, providing a wider pool of potential occupiers.
At purchase, Duet reflected a 3.6% net initial yield, but just three months later, owing to rental growth, the yield has risen to 3.8% – and we expect it to breach 4% during 2023. Additionally, occupancy rates have been consistently above 99%. The early signs of our ownership journey have certainly been positive, and we are seeking to add similar assets to our portfolio over the coming years as the BTR revolution establishes itself.
Jos Seligman is investment director at Mayfair Capital