While the growth of the private rented sector has been flat over the last five years, this masks changes in the structure of the sector. Despite the pandemic, growth in build-to-rent – schemes backed by financial institutions destined for the private rented sector – has continued apace, and by the end of 2020, the sector accounted for around 1% of homes let. Does this mean build-torent is poised to crowd out the average landlord with one or two properties? The answer, certainly in the short to medium term, is no.
The build-to-rent model of the last decade has been to offer high specification city centre apartments with additional services that will command a rental premium. While the precise nature of locations and services have evolved, the basic principles remain very similar to a decade ago. This means that tenants who have bought into the model tend to be considerably more affluent than the average renter. Our research suggests that almost half (45%) of households who signed a contract with a build-to-rent provider in 2020 had an income over £50,000, compared with just over a quarter (26%) of households in the private rented sector overall. The median household income of a tenant living in a build-to-rent scheme is £14,000 higher than
that of the average tenant – more than what the average tenant pays in rent annually.
Build-to-rent schemes are generally concentrated in town and city centres where rents are higher. Also, they offer additional services such as concierges, broadband and gyms, the price of which is often included in the rent. Many of the tenants would have otherwise been renting centrally located newbuild flats being let by landlords who had bought into build-to-sell schemes.
Even in build-to-rent’s core market, there is plenty of room left to grow. Last year around 2% of all tenant households earning over £50,000 chose to live in a build-to-rent home. Even if the market share increased ten-fold over the next decade, build-to-rent would still only account for 20% of lets agreed to tenants earning over £50,000, which equates to around 5% of homes let in the private rented sector last year
Given their limited market share, there is very little pressure on build-to-rent operators to diversify any time soon. However, at some point, future growth may be easier if they offered a different product to lower-income households and/or locations outside city centres. At this point the growth of the build-to-rent sector could potentially begin to impinge on the business model of landlords owning a handful of properties. But it will not necessarily be an easy diversification.
While no such business model exists on a large scale in the UK, if built-to-rent were to diversify into suburban markets, it is likely the additional services being offered would look fairly different. Firstly, it will be harder to convince tenants living in lower-value areas to pay for additional services. Secondly, the requirements for additional services from suburban homes, houses in particular, will not be the same as for city-centre flats. A family renting a suburban semi is far less likely to pay for a concierge or for sharing a co-working space with their neighbours.
Despite this, opportunities for value-added services still exist. In suburbia, the markets for car hire, laundry and cleaning are arguably larger than in the city centres. However, with homes spread over a larger area, services will be costlier to provide. Instead, suburban build-to-rent growth will likely be driven predominantly by economies of scale, while still maintaining a brand and service standards as points of differentiation. With fewer additional services, a suburban build-torent product could be offered at a closer price point to existing landlords, making the scope for competition much greater.
However, just as small investors face headwinds, build-to-rent operators also encounter challenges to grow their portfolios, particularly if they enter places outside their city centre heartlands. Build-to-rent providers almost always find themselves competing against other developers, typically those building homes for sale, who can afford to pay back development loans over just a couple of years, rather than over the lifetime of the home. This is particularly true in suburban markets where a high proportion of new homes are typically sold privately, mostly to owner-occupiers. When combined with the low-yield environment, this makes bridging the suburban viability gap particularly challenging for build-to-rent operators.
All this means that, for the immediate future, build-to-rent will continue to provide a different product at a different price point to 99% of small landlords.