The growing maturity of the build to rent market has been making its mark on town and city centres across the country. Thousands of new residents have breathed life into high streets, but the pace of growth means that new developments are ever more likely to be launching next door to each other.
Increasingly, there are now two, three or even four build to rent schemes operating in the same neighbourhood, giving renters more choice than ever before. So what does the launch of a new development mean for existing schemes?
Our analysis suggests that when a new build to rent scheme launches on the doorstep of an existing scheme, it has an impact on rents at both developments. Typically, the arrival of a new development tends to boost rental growth in the existing development. This boost means that rental growth is usually faster than in the new scheme down the road and schemes in the surrounding local market.
This faster rental growth means that during the first three years, the gap between rents in an existing development and the new development closes by an average of 20%. Rents tend to rise at both schemes, but they typically tend to rise faster at the older scheme. It’s a similar story for developments which initially offer very similar rents and amenities, as well as those targeting very different ends of the market.
This suggests that at least some of the marketing invested in the new scheme rubs off on already established neighbouring developments. In most, but not all cases, the first scheme in a neighbourhood tends to be cheaper than later arrivals. This suggests would-be tenants tend to consider both options and, in many cases, see value in the older scheme.
This convergence in rents typically takes place during the first three years post-launch of a new scheme, predominantly while developments reach full occupancy and before the gap between rents becomes more firmly established.
After the first three years, both schemes broadly continue to track the wider rental market, with the pricing differential between the two schemes now firmly established. This also marks the point at which the new scheme is no longer new.
Our analysis suggests that beyond this, new build to rent developments tend to track rents in the local area fairly closely. Build to rent prices have risen by 33% over the last five years, a figure which is around 2% lower than the 35% growth recorded by the markets surrounding the scheme.
Rather than rental growth being depressed locally by what is often a large number of new homes being launched into a local market at a similar time, the 2% differential in rental growth typically comes at the point when homes begin to be relet for the first time.
When homes are no longer being marketed as brand new, values tend to rise more slowly than the wider market. This suggests tenants are willing to pay a small premium to live in a property which hasn’t previously been occupied. However, there isn’t evidence that rental growth slows further when the home is subsequently later re-let.
This means that in the short to medium term, the premium attached to the build to rent offering is fairly robust. The premium is at its maximum when both the unit and the scheme are brand new and as the first tenant moves in. It then dips a little due to wear and tear but remains fairly steady beyond this.
However, most build to rent developments are still fairly new and are yet to hit the point where investment that goes above and beyond looking after tenants on a day-to-day basis is required. In 10-15 years' time, wholesale investment will likely be required to refurbish communal areas, redesign gyms and potentially replace some building components.
But unlike the new homes being relet by private landlords, build to rent operators have total control of the building and the home. Longer-term this will offer the opportunity to protect premiums and tailor an offering to future tenant trends. In some cases, this may require a relatively large level of capital investment, so whether every operator follows the same trajectory will probably depend on the rental values which can be achieved and the level of competition locally.
