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Gazing from the top-floor windows of my Georgian-style mansion block in 2035, I reflect on the UK housing market revolution that brought me here. It began with the bulldozing of planning rules in the wake of Labour’s historic 2024 election win. It ended with the completion of Starmerville, the bustling new town where I rent my home from the Manitoba Dentists Pension Fund.
Naysayers quibbled that the government lacked financing for 1.5mn garden sheds, let alone the 1.5mn new homes it had promised in opposition. They had not reckoned with the progressive instincts of investment institutions. These helped realise the prime minister’s vision via the burgeoning build-to-rent sector.
OK, as futurology goes, the preceding paragraphs are hardly as gripping as HG Wells’ The Time Machine. But it is tempting to imagine that the UK’s housing crisis justifies a bigger role for build-to-rent. Here, big investors finance housing developments in return for a lengthy income stream of rents.
The tenanted property sector is in crisis. This weighs heavily on “Generation Rent” — young people who cannot afford to buy homes of their own. Buy-to-let landlords have been quitting the sector since full tax deductibility of interest payments was abolished a few years ago. Opposition leader Sir Keir Starmer talked up scope for expanding owner-occupation to woo younger voters at last week’s Labour party conference. But his rhetoric also heartened the build-to-rent sector.
This is led in the UK by Legal & General. The savings and insurance business started building rental properties in earnest about six years ago. It has committed some £3bn so far. US private capital giant Blackstone is also active through Sage, a subsidiary specialising in shared-ownership properties.
Build-to-rent has some useful characteristics for investors and tenants. It supplies investors, typically pension funds, with returns of about 7-8 per cent a year. Backers aim to commit capital to properties for the long term, matching their liabilities. Housebuilders, in contrast, suffer from the temptation to sit on land, only developing it when sales look set to yield juicy returns.
Build-to-rent can therefore expand housing supply — and not just at the top end of the rental market. Rents on L&G dwellings typically start at £1,000 per month, according to Dan Batterton who heads up the build-to-rent division.
The main drawback is the small size of the nascent institutionally-owned rental sector in the UK. “It has been touted as the next big thing for years and has not become the next big thing,” points out Anna Minton, an academic, author and expert on UK housing.
Build-to-rent accounts for only about 2 per cent of privately owned tenanted stock of some 4.6mn homes. Developers have completed around 90,000 dwellings since the start of 2019, according to Savills. That compares with 35,000 net sales of buy-to-let properties in 2022 alone estimated by Hamptons using Countrywide data. However, the British Property Federation bullishly predicts that build-to-rent developers will have increased their own stock of dwellings to 380,000 in 10 years. That would be helpful if BTL housing of some 2mn units continues to shrink.
Challenges lie ahead. Landlords are not universally popular, as I know having been one. But a single, bungling BTL landlord cannot become a target for collective anger the way a big institutional landlord can. In 2019, Berlin tenants mounted an “Expropriate Deutsche Wohnen” campaign, after the property group clumsily hiked rents.
Developers and investors will need to curb the temptation to jack up returns by stealthier means. Precedents include the sale by UK housebuilders of leases with escalating charges. The government punished them by abolishing ground rents on new properties.
A more prosaic problem is that there may simply be too little capital to fund a big expansion of build-to-rent. Much current investment comes from the declining pool of defined benefit pension schemes. Some defined contribution schemes are now investing in the sector. But it is too early to say whether they will do so at useful scale.
For many tenants, swapping a small private landlord for a big institutional one would be a case of “same trailer, different park”. For investors, however, UK build-to-rent represents a destination for permanent capital that competes viably with corporate bonds. It also gives them a chance to address a social need — and justifiably to oppose the naming of any new town as Starmerville.
