Historic shortfalls in the delivery of new housing are making homes increasingly unaffordable to buy, leading to people renting for longer. At a time when young families cannot afford to buy homes, but need more space and access to child-friendly amenities, it is the suburban locations that will help absorb this demand.
In parallel, renters are asking more of their landlords, and are prepared to pay a premium for it. Reform in the Private Rented Sector (PRS) is multivariate, but there is a specific focus on the sustainability of rental homes with EPC ratings at the core of legislation. All new tenancies will be required to have a minimum EPC of C, 73.8% of houses in the PRS are currently D or below[2]. This will put significant pressure on the PRS with landlords either having to incur costs to improve their homes or stop leasing them. Put simply for tenants, if you are going to rent your family home you want it to be well maintained, professionally managed and offering a security of tenure that institutional platforms can provide with reliability.
The demand dynamics for single-family housing make it all the more surprising that the asset class has been relatively slow to attract capital. Even now, at a time when interest in single-family is on a strong upward curve, it is multifamily – blocks of flats in urban locations, largely pitched at young professionals – that accounts for most of the build-to-rent (BTR) pipeline. As of September 2022, just 8% of the total pipeline is suburban, single-family homes.[3]
Given the UK’s struggles to hit its housebuilding targets that is perhaps understandable. In pure unit numbers, it is perhaps more straightforward to secure planning permission for an apartment block – or conversion of an existing office tower – in an urban location than it is for a new edge-of-town housing development. But such schemes don’t address the real and growing need for single-family BTR.
One of the advantages single-family BTR holds is that the product is essentially identical to that being built for the private sale market. This holds two advantages. Firstly, it is simple – indeed, essential to the offer – to create blended communities whereby BTR homes sit seamlessly alongside those with owner-occupiers. Secondly, it provides housebuilders with an alternative path during more volatile times, something they are actively seeking to take advantage of.
In an environment of rising interest rates and declining mortgage affordability, the assumptions that underpin housebuilders’ development numbers are being tested. In some situations this is leading to a surfeit of homes, particularly for those developers that are reliant on regular turnover to fund their future activity. Single-family BTR is a solution that works for both parties: the housebuilders are able to sell homes in bulk, while investors gain exposure to a location where demand for good-quality homes remains, but families’ ability to buy has declined.
The opportunity presented by single-family BTR is not theoretical, but has been proven by Gatehouse Bank’s activity and success in the sector. Institutional interest in the sector may have ratcheted up in recent times, but it was in 2014 that Gatehouse established its first platform.
That portfolio, which came to include some 918 homes, consistently had a vacancy rate of less than 2%. In 2021, it became the first UK portfolio of scale to change hands, when it was sold to Goldman Sachs for circa £150 million.
Since 2014, Gatehouse has established another portfolio – UK PRS, operating under the DifRent brand – that is now stabilised at around 750 homes, and is in the process of building a third platform, Start Living, with capital from TPG Real Estate Partners. These homes are managed by Ascend Properties, a property and lettings management agency that sits within the Gatehouse Build-to-Rent Group.
The BTR model is more established in the United States and paves the way for expansion in the UK. The commercial property universe in the UK comprises £951bn, with £512bn held as investments (~54%). However, the PRS alone is valued at £1,205bn of which only 4.65% is held by mainstream investors[4]. The room for expansion in the institutional ownership of homes in the PRS gives way to a number of opportunities. £8bn of institutional capital has been committed to the sector over the next five year, which would represent 30,000 single family BTR homes[5].
Not only is there a disparity between the demand and supply of single-family BTR now, but it is a gap that is set to widen further. Requirements are increasing at a time when delivery – as with homes being built for private sale – is falling short.
Demand is there not only for more housing, but specifically for the kind of homes that only institutional platforms can provide. High-quality, sustainable, well-maintained and professionally managed. Located in amenity-rich areas and within wider communities. Available ‘turnkey’ with white goods included as part of the rental agreement.
If you want to understand more about the single-family market in the UK or have specific queries about your requirements, then please do contact us.
[1]
Knight Frank, Single Family Housing Report 2023
[2] Knight Frank, Single Family Housing Report 2023
[3] Savills, Suburban Build to Rent Report 2021
[4] IPF, The Size and Structure of the UK Property Market: End-2018 Update
[5] Knight Frank, Single Family Housing Report 2023
