"Investors are betting on the structural undersupply of mid-market family rentals in the UK, as affordability pressures become more acute following the removal of government support for first-time buyers and higher mortgage costs"
- Lizzie Breckner - Knight Frank
Knight Frank has launched its latest UK Build to Rent Market Update, revealing that investment in the UK BTR sector hit a new record of £4.6bn during 2023.
The data shows that the full-year total was boosted by an exceptionally strong final quarter, which saw £1.9bn transacted - a 126% increase vs £850m in Q4 2022. The firm highlights the surge in capital flows into the SFH rental sector underpinned the broader growth in BTR, offsetting a drop in multifamily investment.
One major deal transacted last year which has contributed highly to the boost of the sector's performance, was Vistry’s £573m sale of over 1,500 SFH units to Blackstone-backed Leaf Living. However, even excluding this deal, SFH witnessed consistently strong investor appetite according to Knight Frank.
There has been a shift to the regions outside London, fuelled by SFH investment, which captured 77% of volumes versus just 23% for the capital. This represents a material swing from 2022 when London made up 42% of the market.
North American and Asia Pacific investors also provided a lift to the record numbers, with their share of the market expanding compared to recent years. The firm reveals that UK investors still dominate with a 53% share, but appetite from overseas continues to rise.
Jack Hutchinson, Partner in Residential Investment at Knight Frank, said: "The growth in Single Family Housing investment was the standout story in this record-breaking year for build to rent (BTR). The scale and pace of investment, especially from single-family operators and overseas capital sources, demonstrates how much momentum there is behind the BTR concept."
He added: "While we have experienced a challenging year from an investment perspective, with increasing build and development costs, as well as higher interest rate environments, BTR has maintained the ability to shine through the economic storms and address the chronic shortfall in rental housing stock, making it an increasingly coveted asset class."
Lizzie Breckner, (pictured) Head of Build to Rent Research at Knight Frank said: “Our data shows the exponential rise of SFH from less than £20 million in 2020 to £1.9 billion in just three years. Investors are betting on the structural undersupply of mid-market family rentals in the UK, as affordability pressures become more acute following the removal of government support for first-time buyers and higher mortgage costs.
“With SFH now firmly embedded within the BTR ecosystem, all signs point to continued strong growth. Knight Frank is already tracking a further £1.4 billion of SFH and MFH deals under offer or completing in early 2024.”
BTR pipeline
Currently, there are over 100,000 completed, 67,000 under construction, and 77,000 homes across the UK with full planning permission granted. However, BTR still remains a small fraction of the wider UK rental market, with completed BTR homes accounting for just 1.8% of total privately rented households. With strong demand drivers in place, Knight Frank expects further record investment totals in 2024.
The latest economic forecasts for the UK indicate some easing of recent challenges. In October 2023, financial markets anticipated just a 0.25% interest rate cut by the end of this year, but they are now expecting nearly five cuts. Knight Frank highlights that this shift reflects a more positive outlook that should boost investor confidence and business activity.
Nick Pleydell-Bouverie, Head of Residential Investment at Knight Frank said: “While elections and geopolitical volatility continue to bring uncertainty, inflation is projected to steadily drop in 2024, bringing down debt financing costs, which is materially improving investor sentiment.
“Oxford Economics predict the base lending rate will end 2025 around 3.2% after a series of cuts in 2024. In this climate, joint ventures and forward commit investment deals are increasing as investors seek to share risks and defer major cash outlays. Meanwhile, softened yields and strong rental performance are attracting increased capital to the sector.”
