Market insight Measuring the build to rent premium
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Measuring the build to rent premium

Over the last five years, build to rent (BTR) developers have been able to command growing premiums over and above properties of a similar age, size and specification let by private landlords. In fact, so far this year BTR investors have achieved an average of 10.6% more in rent than a landlord offering a similar flat nearby. This is up from 6.5% in 2016.

The ability to achieve a premium is largely down to two main factors. Firstly, today’s BTR investors are increasingly designing and building their own rental stock which means they’re easily able to add in shared amenities such as gyms and cinema rooms to widen their appeal to tenants. And naturally this increases the premium over and above what private landlords can charge nearby. It also means that BTR landlords can begin to build a reputation with tenants willing to pay a little more for certainty of service levels and additional facilities.

Secondly, the shift beyond London has seen institutional investors less likely to cannibalise each other’s markets. This means that more schemes are opening up in new areas where there is little or no direct competition from other BTR providers. Instead, these investors are more likely to be competing against private landlords who have bought into a new build block alongside owner occupiers. And with less like-for-like competition, this means BTR schemes are able to command a larger premium.

Despite rising premiums, a signifi cant amount of growth in the sector is coming from suburban ‘single family’ homes. Back in 2016, just 1.7% of BTR homes advertised were houses, a figure which has risen to 8.2% so far this year. These houses tend to command a smaller premium than flats when compared to homes of a similar size and age off ered by individual landlords. This is predominantly a product of suburban house developments off ering fewer additional services than those within BTR flat schemes located in city centres.

The flipside of the smaller premium, which sits at 7.0% for houses, means that suburban BTR schemes have the potential to widen the appeal beyond the core market dominated by young professionals. While city centre schemes have appealed to higher earning tenants willing to pay a premium for location and facilities, BTR’s suburban customers are more likely to be middle income couples or families who rent from a private landlord locally.

Over the short to medium term, we expect the BTR premium to continue rising as it breaks into new markets outside London and the city centres of Birmingham, Liverpool and Manchester. Longer term, however, we think the premium will stabilise as more schemes find themselves in competition with each other and the sector diversifies beyond its traditional tenant base by becoming more affordable. This will be aided by the suburban shift, meaning more houses with lower premiums. The scale of this change is likely to be supported by the government’s ongoing home ownership drive, which continues to squeeze private landlords.

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