UK PROPERTY INVESTMENT SPECIALISTS

Market News & Reports

LONG-TERM FUNDAMENTALS WILL UNDERPIN DEMAND FOR BTR ASSETS

2020-04-06

Demand for income-producing residential assets in the UK has risen sharply over the past few years on the back of a burgeoning private rental sector and a desire among investors to diversify into new asset classes offering stable income streams.

 

Source: Oliver Knight, Knight Frank, 01 Apr 2020

 

Data from RCA confirms this trend with £10.7bn invested in alternative residential stock (which includes build-to-rent, as well as purpose-built student accommodation and senior living) in the UK in 2019, up almost 60% on levels in 2016.   

 

The full impact of COVID-19 on the sector has yet to become clear. There is anecdotal evidence pointing towards a slowing of transaction volumes, with an inability to carry out inspections and surveys of tenanted properties proving challenging, even before the government-enforced lockdown in the UK.

 

However, longer-term the outlook is unchanged. Rental accommodation has proven resilient in previous downturns, as the chart below shows. Between 2008 and 2009, property prices fell around 15% on average. By comparison, rents rose 3%.

 

 

And early indications suggest that demand from investors is still strong, particularly for stabilised assets. The rental market’s strong ties to demographic trends rather than economic cycles suggests that, regardless of any short-term economic shocks, the fundamentals which underpin this demand are still favourable.

 

 

Moreover, these fundamentals are expected to remain in place, in part due to swift government intervention to shore up employment markets. Forecasts from Oxford Economics suggest that unemployment will peak at 4.17% later this year, before returning to current low levels by Q3 2021.

 

The UK population, meanwhile, is forecast to grow by nearly 3% over the next decade, creating an additional 1.65 million households. Government estimates suggest that 300,000 new homes are required annually to meet housing need and address historical shortfalls.

 

Against this backdrop, the demand for privately rented homes will continue to grow. Currently around 20% of households rent privately, up from 10% in 2001, and this trend is expected to continue. In addition, there has been a generational shift in the private rented sector. More households are now living in rented accommodation for longer, and while housing affordability is certainly a factor here, rented accommodation is also becoming an established flexible form of tenure, especially among younger workers.

 

As Nick Pleydell-Bouverie, Head of Residential Investment Agency at Knight Frank, comments, “The demographic fundamentals for investing in PRS remain incredibly strong. In the UK, we have a shortage of housing, a growing population and an increasing proportion of that population now looking to rent. The income offered by the rental market is both highly secure and shows long-term appreciation; a rare and valuable commodity in today’s world”.

 

What happens to unemployment rates in the coming months - a key story for the PRS market - will be key in determining the direction the market heads. For now, pledges of unprecedented levels of government support are keeping unemployment forecasts relatively low.

 

 

The main drag on activity is therefore likely to be a lack of available stock, with site shutdowns expected to result in a slowdown in housing delivery and completions volumes this year. Our analysis suggests there are 238 build-to-rent schemes currently under construction across the UK.

 

We would expect work to complete a significant proportion of these schemes will recommence after a short delay. Many will have been forward fund deals, with the developer typically getting a guaranteed and pre-agreed return for delivering the scheme – an increasingly widespread option for developers and housebuilders looking to de-risk.

 

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