Opportunities and challenges in the UK Build-to-Rent market

In the first nine months of 2024, total investment in the UK’s Build-to-Rent (BTR) sector reached over £3.2 billion, marking a remarkable 20% increase compared to the same period in 2023¹. This robust growth underscores the sector's resilience and appeal, even amid global economic uncertainty.

In this article, Jake Le Brocq, a real estate specialist in our global corporate services team, delves into the key trends shaping the BTR market, explores the opportunities it presents, and considers the challenges investors and developers face.

Factors driving UK Build-to-Rent growth

The BTR market's growth is driven by several factors. The UK continues to grapple with a significant housing shortage, pushing many people towards rental options. Among these, new-build BTR properties stand out due to their modern amenities and higher building standards. Investors are increasingly drawn to the sector due to its proven returns and stable demand. This combination of high tenant demand and attractive yields creates a compelling investment proposition.

As of the first quarter of 2024, average gross rental yields for residential properties in the UK varied significantly by region. The Northeast region recorded the highest yields at approximately 7.65%, while London had the lowest at around 4.93%². According to CBRE's UK Real Estate Market Outlook 2024, yields are expected to remain stable, with any minor adjustments mitigated by strong rent growth³. Of course, it's important to note that these figures represent gross yields and do not account for expenses such as taxes, maintenance costs and management fees. Additionally, rental yields fluctuate based on factors such as property type, location and market dynamics.

Diverse tenant demographics shaping Build-to-Rent developments

BTR properties appeal to diverse tenant groups. Young professionals and office workers relocating to cities for short-term assignments often prefer BTR schemes for their convenience and flexibility. International students, like those at the Station Hill development in Reading that we recently supported a client with, are drawn to the premium amenities BTR offers compared to traditional student housing. Additionally, professionals seeking affordability while commuting to larger cities are attracted to properties in satellite towns.

The post-pandemic shift and regional BTR growth

The pandemic reshaped work patterns, with many businesses reducing their real estate footprint in London and moving to regional hubs like Manchester and Birmingham. This shift has bolstered regional BTR schemes. Mixed-use developments such as Station Hill combine residential units with office spaces, providing an integrated living and working environment. Notably, 68% of the current BTR pipeline is outside London⁴, highlighting the sector's geographic diversification.

Challenges and market risks in the BTR sector

While the outlook for BTR is strong, the sector faces several hurdles. Economic pressures, including construction inflation, higher interest rates and labour shortages, have increased development costs, squeezing margins for developers. Furthermore, the cost-of-living crisis has made renters more price-sensitive, potentially limiting rental growth. Regulatory and taxation challenges also loom large, with proposed changes like the Renters’ Reform Bill potentially increasing compliance costs for landlords. Tax adjustments, such as changes to property taxes or VAT exemptions, could similarly impact investment returns.

Planning delays and competition for land in urban areas remain persistent obstacles, while stricter sustainability goals add complexity and costs. We wait to see the impact of the Labour Government’s ‘Plan for Change’ milestones, which include a target for building 1.5m homes and fast-tracking planning decisions on major infrastructure projects.

Innovative BTR developments

To address these challenges and maintain their appeal, BTR developers are adopting innovative approaches. Many schemes now include amenities such as gyms, co-working spaces, and retail outlets, creating self-contained communities. Smart home technologies and high-speed connectivity are becoming standard, enhancing tenant satisfaction. Developers are also focusing on larger projects to achieve economies of scale and meet investor return expectations.

The future of the BTR market

Looking to 2025 and beyond, the BTR sector’s trajectory will depend on navigating regulatory changes, managing costs, and meeting tenant demands for quality and affordability. Despite these challenges, the sector is poised for continued growth due to strong institutional interest, evolving tenant preferences, and the ongoing housing shortage.

The UK BTR market is a cornerstone of the housing sector’s future. By balancing innovation with financial discipline, it can continue to deliver value for investors and high-quality living for tenants.

How does Praxis assist its real estate clients?

As the UK BTR market grows, Praxis offers expertise in end-to-end real estate services, ensuring clients are well-placed to capitalise on these opportunities. Our expert team has worked on smaller-scale developments through to large multi-purpose projects across BTR, office space, senior living and retail.

If you would like to explore how we can support your growth in this dynamic market and provide tailored solutions for the complex regulatory and market conditions, please get in touch with Jake or a member of our corporate services team.