Market insight Where is the next opportunity?
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Where is the next opportunity?

As build to rent (BTR) schemes transform city centre skylines up and down the country, developers are also casting a speculative eye on the wider suburban market. But how big is the potential suburban BTR market, and what might it look like?

Rural and suburban rental markets are much smaller than their urban counterparts. Around 23% of urban households rent their home privately, compared to just 16% of suburban and 10% of rural households. Despite city dwellers being most likely to rent, this still means that around 55% of renters live outside a city. And as the chart over the page shows, the homeownership divide for households that are slightly more affluent than average (typically BTR’s largest customers) gets narrower.

At the same time, existing suburban and rural rental markets tend to be older and in general less affluent, meaning the opportunities for a premium product among current tenants is weaker. Tenants here are more likely to be older, longer-term renters rather than younger households renting through choice. While 45% of tenants live in a city, they account for 75% of all rented households earning over £50k. And for every £1 they spend on rent each month, their rural counterparts spend just 32p.

The second big barrier to institutional investment in suburban and rural markets is lower yields which have been compressed further by rapidly rising prices. Strong demand from owner-occupiers willing to pay a premium for more spacious family homes in the suburbs will make it harder for institutional investors to secure stock when buying in bulk from housebuilders.

This means in the short-term, the shift to suburbia is still likely to be predominately driven by blocks of flats close to train stations or town centres, rather than streets of semi-detached homes which tend to be lower yielding. To grow at scale outside their existing heartlands, BTR operators will need to adopt a different model to appeal to less affluent markets. Typically, this will be at rents which are much closer to those charged by private landlords.

It is therefore likely that any shift out of cities will take place over a much longer period than the current urban BTR boom. It will rely on BTR either taking their existing customers with them or tailoring their product to more rural renters. Either way, this transition is likely to be relatively slow given the additional challenges and costs associated with providing the right sort of home more rural tenant’s desire.

Despite BTR operators dipping their toe in suburbia, they still have plenty of room to grow in their urban heartlands. Our estimates show that around 15% of the current 4.6m rented households in Great Britain could afford a BTR home where they live, with 80% of them living in a built-up area.

It is likely that the end of the Help to Buy scheme will see some homes which were destined for owner-occupiers form part of BTR deals as house builders seek to reduce their sales risk, particularly if the market was to slow significantly. These will likely be fed into the more affluent end of the rental market at prices that sit in the top 5-10% of homes locally.

However, in our view, a mixture of demographic barriers and low yields will combine to mean BTR predominantly remains an urban product where larger premiums and economies of scale can be achieved, meaning portfolios can grow more quickly. Significant growth outside cities which addresses the current rental stock squeeze is likely to take much longer. It will rely on outward migration of existing BTR customers or accepting a smaller premium by renting to new lower-income households. Or perhaps a combination of the two?

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