Cushman & Wakefield’s sector polling of Build to Rent (BTR) investors in the UK reveals they have an estimated £8.1bn targeting the sector in 2024.
The survey features representative views of institutional investors who own a combined 49,000 operational BTR units (around 50% of the total market) and 28,000 pipeline BTR units, as well as others planning to enter the sector. Half the respondents have more than 30% of their UK real estate portfolio allocated to BTR for 2024.
The BTR sector saw strong investment in 2023 despite challenging market conditions, with £4.3bn invested, only marginally down versus £4.4bn in 2022. Cushman & Wakefield expects investment volumes to rise in 2024 as the cost of debt and construction cost inflation eases. Of those surveyed, 13% of investors who currently have no exposure to BTR plan to invest in the market in 2024.
When asked about asset type, investors favoured amenity light, urban BTR schemes with mid-market rents. When questioned on location preferences, investors’ top choice was London Zones 1-3, according to the survey. Regardless of preferred asset class or location, sustainability was reported as an important consideration, with schemes that have an EPC rating of D or below, deterring 75% of investors.
But lacklustre new supply to continue
Against this backdrop of positive sentiment, however, the surveyed investor sample will only be bringing forward an additional 28,000 BTR units in the next few years, likely to be reflecting a lack of viable opportunities rather than capital willing to be invested. Therefore, the supply-demand imbalance within the rental sector will not be resolved in the near future.
The survey also found that 29% of investors plan to dispose of some of their portfolio over the next 1-3 years. Respondents stated the main reason for selling was that the stabilisation/exit strategy had been achieved.
Mille Harper, head of living research at Cushman & Wakefield, commented: “There is undeniable strength in demand in the UK BTR sector, and despite 2023 being a tough market, the sector still managed to transact £4.3bn. There is plenty of optimism and enthusiasm amongst investors, attracted to the sectors defensive performance and underlying structural trends. With forecasts anticipating a gradual easing of monetary policy by the Bank of England in the second half of the year and construction cost inflation easing in 2024, there is some cautious optimism that BTR investment will increase in 2024.”
Investment types and priorities
Investors’ top pick for preferred asset type were amenity light, urban BTR schemes with mid-market rents, with 53% voting it as first choice and 25% voting it as second. Appetite for this asset class has been driven by lower turnover rates than prime stock, lower operational costs and a larger tenant pool.
Amenity-led urban BTR schemes followed in second place, with 25% voting it as their first choice and 31% voting it as their second choice. Next was Single Family Housing, with 19% voting it as their first choice. This asset type is more challenging to gain scale in and has operational challenges, hence its lower levels of interest.
Aside from asset class, sustainability is a key consideration for investors, and schemes falling short of investor expectations on emissions and net zero commitments will likely face reduced appetite. A BTR scheme with an EPC rating of D or below was the biggest deterrent, with 75% of investors not willing to invest. This theme continued in their views towards schemes with gas boilers, with 47% not willing to invest in a scheme with this type of heating.
Location preferences
London Zones 1-3 was the most popular choice for investment with 41% of the vote. However, 28% of investors ranked it last in their choices – when scores were combined, it ranked second last. Clearly, there is divided opinion on the popularity of the centre of the capital. Comparatively, 19% ranked Zones 4-6 as first choice and it was the second highest scorer for second choice with 34% of votes.
The second choice for investors was prime regional cities, such as Manchester and Birmingham, with 22% ranking it first choice. This was supported when investors were asked to name top investment locations for 2024. London was the first pick, followed by Bristol, Manchester, and Birmingham.
Edinburgh was named the 5th most popular city, despite the rent caps introduced in 2022, though currently the caps are not applicable for new leases so rental growth reached 14% in the last 12 months (Dataloft). This choice by investors shows that supply vs demand imbalance trumps the impact of the regulations.
Barriers to entry
The most prominent barriers to entry for investment in the BTR market are, encouragingly, issues that will likely ease in the next year or two. These were cited as being ‘cost of finance’, followed by ‘entry yield’ and ‘unviability of schemes’.
Projections show that the latter half of the year will see an easing of the cost of financing when the Bank of England begins to ease monetary policy. Inflationary pressures are also expected to lessen towards the end of the year.
