The build-to-rent sector is thriving as more institutional investors switch their focus from commercial real estate, like offices and shopping centres, to houses.

Chatter about house prices is a favourite of many, but it is now also high on the agenda with large institutional investors. Lloyds Banking Group, for example, has indicated it seeks to get into the build-to-rent sector, revealing that it plans to own fifty thousand properties in the next ten years. Likewise, John Lewis announced last year that it would build ten thousand rental properties. These institutional investors are not alone, as many more big names have announced their entry into the build-to-let sector, including insurance companies and private equity companies.

“To give an idea how large the rental sector is in Britain and how fast it has grown, we only need to look at recent historical data,” said Jamie Johnson, CEO of FJP Investment. “In 2001, the number of English households that rented was about 10%. Twenty years later, in 2020, it had jumped to 20%. A significant increase.” The largest portion of these rental property investors are individual landlords holding a small portfolio of properties.

Changes in the past ten years

The rental sector has started to change, and in the last ten years we have seen the greatest change of all in terms of those investors that comprise the owners of buy-to-let properties. A market that is dominated by small, individual investors is now seeing more professionalised institutional investors showing keen interest.

Ten years ago, the stock of build-to-rent houses was around 1,000 units. Now, in 2021, it is over 62,000, with an additional 133,000 more in the pipeline. Housing market analysts have predicted that, within ten years, 20% of all newbuild homes will be institutionally owned and rented out.

Reasons for the change

There are several factors involved in why more institutional investors are entering the build-to-rent sector, and some are worth mentioning here. One reason is due to the fact that traditional properties like retail and office space properties no longer hold the interest and investment value that they once did.

Even before the pandemic hit in early 2020, which caused huge disruptions to the retail sector from lockdowns, shopping centres and high street shops were long in decline. The convenience of online shopping has had an enormous impact on the high street, and with the pandemic, this trend has only skyrocketed.

Likewise, rental office space has become less in demand as more companies allowed workers to work from home during the pandemic, and they are now considering adopting hybrid working – a combination of office-based work with virtual work – as part of their normal working practices.

Demand for residential properties is not so much affected by business cycles as compared to commercial real estate. People will always need a roof over their heads and a bed to sleep in, something that cannot be tuned into a digital equivalence. Furthermore, with long-standing low interest rates reducing pressure on rental profits, rental incomes have proved very attractive to investors.

In previous years, high-end luxury builds, adorned with swimming pools and manicured lawns, were the main type of build-to-rent properties that were developed. Times have changed. Now, strong growth can be found in single family homes in the suburbs, on the edges of major cities. Families are more reluctant to move because things like changing schools are a big deal and very disruptive to children’s lives, both in terms of education and socially. Therefore, families with children are favoured as tenants by large, professional landlords, who normally have longer-term perspectives on investing. In the next decade or so, we can expect to see even further changes as demand for properties like shared ownership and bespoke retirement homes continue to increase.

For the housebuilding industry, large institutional investors entering the build-to-rent sector with greater intent will translate into a huge benefit. Not just because of reduced interest in commercial property like shops and office space, but the timing is interesting for another reason. The UK government’s rules on the “Help to Buy” scheme were tightened earlier this year, and it is set to end totally by 2023, ending the opportunity for loans that allow borrowers to buy houses with smaller deposits. With large institutional buyers waiting in the wings for rent-to-buy houses, house building can accelerate to meet growing demand.

Given that demand is high for construction materials due to global supply chain issues, and with materials like timber being in short supply due to more forest fires as a result of climate change, it remains to see how things progress in the short-term with institutional investors in the build-to-rent market.