Real Estate

Investors plough record sums into UK build-to-rent properties

Banks, property funds and other institutional investors poured a record amount of cash into the UK’s rental property market last year, fuelling a boom that looks set to continue into 2022 owing to a chronic lack of homes in the country.

Investors ploughed £4.1bn into the UK’s fast-growing “build-to-rent” sector last year, more than half of which was spent in a bumper fourth quarter, according to property advisory CBRE.

That was about £500m higher than 2020’s previous record. Close to £2bn worth of deals are already in train for this year and a further £2.5bn being marketed, according to CBRE.

Build-to-rent developments are typically purpose-built blocks of flats operated by specialist corporate landlords. Well established in the US and continental Europe, the model has been gaining ground over the past decade in a UK market that has historically been dominated by a patchwork of smaller buy-to-let landlords.

The UK’s nascent market has attracted interest from US investors including Goldman Sachs and property group Greystar, Australian investment bank Macquarie, German real estate investor Patrizia and UK financial services institution Legal & General.

More recently, the sector has drawn in less experienced domestic players, including Lloyds Banking Group and shopping centre chain John Lewis.

Lloyds is aiming to expand aggressively, with internal documents revealing an intention to build up a portfolio of 50,000 rental homes by 2030, which would see the bank leapfrog FTSE 250 company Grainger, one of the UK’s oldest and largest landlords that has 9,000 properties.

The new entrants are looking to gain a slice of a market that analysts predict will grow significantly over the next few years.

Even in the US investors are still flocking to purpose-built rental developments. This week, the Wall Street Journal reported that entities tied to WeWork co-founder Adam Neumann had built up majority stakes in thousands of US properties worth more than $1bn. 

Build-to-rent apartment operators espouse the benefits of a more professionalised renting experience in the UK, where complaints about unscrupulous independent landlords are commonplace.

Column chart of Estimated number of units (000) showing Build-to-rent development in the UK

But in more established markets, build-to-rent developers have been criticised for delivering expensive flats that do not address the housing affordability crisis. In the past six months, there has been vociferous opposition to corporate landlords in Spain and Germany, who are accused of driving up rents.

In the UK, the expansion of the model is being driven by investors hunting stable returns and by the “chronic shortage of good quality housing in the UK”, according to Jason Hardman, an executive director at CBRE.

During the pandemic, investment has accelerated as property investors bet that purpose built flats will provide more reliable returns than shops, offices or an unpredictable equity market.

“There’s been a changing of the guard in terms of what’s regarded as a secure asset class. Beds and sheds [warehouses] were certainly the themes of last year for investors — some have changed direction and are putting investment primarily into those asset classes,” said Hardman.

Richard Valentine-Selsey, research analyst at property company Savills, said the sector still had room to grow considerably. “2021 was a landmark year for new entrants. About a third of all deals were struck by new entrants, a sign that we are still very early on in the development of this sector.”


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