The latest figures have been reported in Knight Frank's annual Multihousing Report 2022/23, which was released yesterday. In it, the company says that £3.2 billion of capital has been committed to the UK’s BTR sector during the first three quarters of 2022, with a further £650 million expected to trade before the year ends.
This, Knight Frank adds, would take full year investment to £3.8 billion - some 31% higher than the 2016-2020 long-term average.
Jonathan Stevenson, head of Build to Rent Funding at Knight Frank, said: “Investors have been undeterred by a macroeconomic backdrop characterised by soaring inflation and rising interest rates. However, higher financing costs since September’s ‘mini budget’ mean we expect a slowdown in investment in the final three months of the year as some highly leveraged investors take a pause.
“That said, deals are still progressing. Investors are buoyed by the counter-cyclical qualities of the sector, which remains attractive thanks to the low volatility and robust resilience of the rental market in times of economic turbulence; the structural supply shortfall of rental homes and subsequent opportunity for scale; and growing tenant demand as more people rent for longer.”
Where is the investment coming from?
According to the research, 65% (£2.15 billion) of investment in 2022 has come from pension and insurance firms, with the remaining 35% of capital invested by a combination of propcos, REITS and private equity firms.
The biggest source of overseas investment into the UK's BTR sector in 2022 has been from North America, according to Knight Frank, with the agency estimating that North America accounted for 28% of overall capital invested. Not far behind was Europe, making up 23% of overseas investment, with Asia Pacific investors accounting for only 2%. Nearly half (42%) of capital was invested by UK firms.
Rental growth supports BTR delivery
The firm, upon analysing the UK's growing BTR pipeline, found that the number of completed units has triped over the last five years. At present, there are over 72,000 complete and operational BTR homes in schemes of 75 units or more across the UK, Knight Frank found.
Meanwhile, a further 57,000 units are currently under construction, while an additional 61,000 have full planning permission granted. As a result, this brings the total BTR pipeline to 190,000 homes (excluding sites in pre-planning). Knight Frank's research shows that some 24% of local authorities now have at least one BTR scheme open and operational within their jurisdiction.
Oliver Knight, Head of Residential Development Research at Knight Frank, commented: “Prospects for rental growth will also be supported by the fact that the proportion of earnings spent on rent has been steadily declining in recent years and sits below the long-term average. The average renter spent 35% of their pre-tax income on rent in 2022, down from closer to 40% five years previously. For couples and sharers, this figure will be even lower. Whilst we expect our rents will moderate from current highs in 2023, we believe there is headroom in the market for a period of above average rental growth.”
Where are the BTR hotspots?
Knight Frank, as part of its analysis, identified the UK’s high-growth markets with the potential to be BTR hotspots in the coming years.
It did this by examining population growth projections over the next decade, the percentage of the population aged under 35, employment growth forecasts up to 2040, and over BTR market penetration, allowing it to identify towns and cities which boast strong demand drivers but typically have small pipelines – thus presenting a strong case for development.
Knight Frank has named Norwich, Peterborough, Cambridge, Ipswich, Stevenage, Chelmsford, Watford, Oxford, Windsor, Maidenhead, Bracknell Forest, Leatherhead, Woking Tunbridge Wells, Portsmouth and Exeter as emerging growth markets.