Build to Rent opportunities in the South East and East

This is the third article in our ongoing monitor of 109 local authorities across the South East and Eastern regions, examining and weighting several supply and demand-side build to rent opportunity variables for each, and then ranking them. 

Where are some key opportunities?

Since our last update in 2021, the sector has continued to grow rapidly. At that time, we reported that there were approximately 188,000 units either already completed, under construction or in the planning pipeline. This number has now jumped 27% in less than two years, to 240,000. Of this, 77,000 units have completed, 33% more than in the summer of 2021 (Source: British Property Federation (BPF)).

Despite this increase in BTR units the private rented sector still suffers from an acute lack of available stock as private landlords have been exiting for years now due to the various tax changes and regulations which have made the sector far less attractive. On the other hand, demand remains high with recent data from the English Housing Survey noting that after four years of consecutive falls, there was a sudden rise in the number of households in the private sector last year. There are now a reported 4.6 million households privately renting, equating to an additional 178,000 private renter households entering the sector in just one year. Clearly, build to rent units alone cannot keep pace with the additional number of households moving into the sector at current rates.

This rise in demand over the last year, coupled with the lack of supply has meant that rents have also risen rapidly, increasing by an average of 11% in 2022 (outside of London) while London rents increased by 14% over the same period. Average rents outside of London are now £977 per calendar month (pcm) while rents in London are £2,007 pcm (Source: HomeLet). 

Looking ahead, the new EPC rating regulations (Minimum Energy Efficiency Standards (MEES)), will require a minimum EPC rating of ‘C’ and are due to take effect in 2025, will likely further exacerbate stock issues. From 2025 all new lettings (existing tenancies have until 2028), in private rented accommodation will need to have a certification rating of C or above to ensure that homes are more energy efficient. Current regulations are set at an EPC rating of E or above, and with the older age of many properties in the UK this will have a significant impact on the sector. For private landlords in particular this will be costly and could run costs thousands as they seek to replace non-compliant boilers, single-glazed windows, and add insulation (among many other items) to meet the new standards, and in many cases, landlords may simply choose to sell rather than make the costly improvements.

On the other hand, for the build to rent sector the new build nature of the industry means that properties are already constructed to most of the new standards and regulations (which could so badly damage the average private landlord’s finances). What’s more, professional investors are used to operating in these very tightly regulated environments and will have no problems manoeuvring around any future incoming rental reforms. In other words, the attractiveness of the BTR sector looks set to continue, from both the developer / funder / investor perspective but also from a tenant’s angle. 

In this updated analysis and article looking at opportunity areas for BTR schemes in the East and South East, we consider some forward-looking measures on both the demand side (ie: the projected rise in private rented households and projected employment growth) and the supply side (net additional residential dwellings as a proportion of all households – a new measure, added this year)*. These have all been weighted to give the same level of importance. For the ‘net additional dwellings as a proportion of all households’ metric we looked back at net residential completions over the last five years as a proportion of the total number of dwellings in that local authority. If the proportion is low, this is marked as a favourable location with good opportunity for growth using the assumption that pent up demand from a lack of past residential development, coupled with restricted supply for owner occupiers, means there will be a push for future BTR supply. 

Of the top 10 locations, four are located in Hertfordshire while a further three are in Surrey. All locations are well connected and easily accessible to London, offering more open space and being in countryside or suburban areas. In all, these locations fit ideally with the changing dynamics of housing demand given the more hybrid and flexible working model so widely adopted over the last three years. It is also worth noting that all of these areas are highly suited to the single-family housing model of BTR, not simply the ‘traditional’ urban block or multi-family style scheme which is so often considered the standard BTR model. 

We have discussed in some detail our top five locations for build to rent developments and highlighted the top ten. Nevertheless, this does not mean a lack of opportunities exist elsewhere. With the latest jump in the number of households in England in the private rented sector last year and a nearly 30% rise in house prices over the last three years, the key fundamentals on the demand side of the sector remain very strong. 

On the supply side, private landlords continue to exit the sector and sell their assets. Tax rises, changes to legislation and tighter regulations have made it a less appealing and more onerous sector for the average private landlord. 

This supply demand mismatch has placed strong upward pressure on rents and resulted in their sustained rise over the last two years. The combined impact of these fundamentals should provide further encouragement and optimism for developers, funds and institutional investors looking to enter the sector.

* Note on methodology:

1. Current and projected house price growth (5 year) using HM Land Registry data and Experian forecasts.
2. Annual employment growth (5 year and 10 year) using Experian forecasts
3. Current and projected average annual incomes using ASHE data and HM Treasury forecasts
4. Current households and dwellings using ONS data
5. Net additional dwellings using DLUHC and MHCLG data
6. Current and projected private renter households (5 year) using ONS data and Experian forecasts