New investment for suburban BTR – is it about to boom?

A wave of capital is heading for the UK’s rapidly growing suburban Build to Rent (BTR) sector, according to recent research carried out by global property consultancy Knight Frank.

The firm said this comes as investors look to diversify and grow their exposure to the private rental market.

The last year has seen a speedy acceleration in the volume of capital looking to enter the suburban BTR market, according to the Knight Frank Suburban Build to Rent Housing Report 2021, with £275 million invested since the start of 2020 alone. Meanwhile, a further £7.8 billion is earmarked for deployment within the next five years.

Knight Frank argues that the opportunity for investors to deliver purpose-built rental housing is clear, with there currently being 2.3 million privately renting households who live in suburban areas around the UK. What’s more, the majority of private renters (60%) already live in houses as opposed to flats.

“To date, the capital committed to the suburban build to rent housing market remains a fraction of overall institutional investment into build to rent. However, our analysis suggests the sector is set to see significant growth over the coming years, underpinned by strong investment and demand-side fundamentals,” Oliver Knight, head of residential development research at Knight Frank, explained. 

Jack Hutchinson, an associate in the residential capital markets team at Knight Frank, added: “Given Knight Frank’s research, it comes as little surprise that a growing number of dedicated suburban build to rent housing investment and development vehicles have been created in the last year to specifically target this burgeoning market. There is a clear opportunity to increase the delivery of purpose-built rental housing and bring the benefits of institutionally-managed product to more renters – particularly young families -- and investors are taking advantage of this.”

Early evidence of investor appetite for standing assets can be seen in Pitmore’s Goldman Sachs-backed £150 million acquisition of a portfolio of more than 900 suburban homes in the North West in January 2021. Similarly, PGIM Real Estates’ acquisition of the Wise Living suburban BTR portfolio, made up of five stabilised assets and three development sites across the Midlands and the North, backs up this rising trend.

Knight Frank says this isn’t a surprise given the investment fundamentals are strong. In recent years, households aged 35-plus have consistently been the fastest-growing group of private renters.

Typically, such households usually require larger properties in less urban locations, often with a garden, and located close to local amenities and within reach of employment hubs.

According to the firm, they also tend to be infrequent movers, given their ties to local schools, employment and support networks. This means a lower tenant turnover, longer tenancy terms, and fewer and shorter void periods for investors – which in turn results in a more secure income stream and reduced operational costs.

People’s desire for space – both inside as well as out – has also risen because of months of being housebound, due to multiple Covid-19 lockdowns. Some 72% of respondents to Knight Frank’s latest client survey said that having a garden or access to green space is more important now than it was pre-pandemic.

Additionally, 53% said that experience following Covid-19 meant they were now looking for a larger property, while a further 67% of people said they want a dedicated space to work as remote and/or hybrid working remains popular.

Knight Frank says this search for space has already driven demand for housing in suburban markets, something it argues ‘is sure to continue’. It believes this trend will likely be one of the most dominant and longest-lasting on the UK’s housing market in the aftermath of Covid-19.

 “In addition to the compelling investment fundamentals, there are a number of key benefits for developers who choose to deliver suburban build to rent,” Hutchinson added.

“Firstly, the forward fund or forward commit nature of these early transactions helps to de-risk projects which could otherwise by subject to a fluctuating sales market. Suburban build to rent can also shorten development timeframes and release areas for development ahead of a sales delivery strategy.”

He continued: “There is often the ability to improve massing on suburban build to rent sites with the adoption of efficiently-designed build to rent units. Finally, the delivery of rental product on a development can assist in the early marketing of any sales product by creating a bustling and lively community in which people wish to live.”