The scale of demand in the UK’s rental sector is huge, motivated by several factors including difficulties for young people getting onto the property ladder and changing generational attitudes towards renting, creating what is becoming known as “Generation Rent”. Over the past decade the number of UK residents living in privately rented accommodation has doubled to 20% of households nationwide (30% in London) and this trend is expected to continue.

The private rented sector is attracting new investors seeking to capitalise on the growing demand for high-quality rental properties. 65% of investors are currently investing in London, however yields are forecast to continue to be higher in the regions. There is an increasing supply of apartments in former industrial cities such as Manchester, Birmingham and Leeds which, as well as offering affordable accommodation that is attractive to younger people, these cities are enticing big professional employers out of the capital, thus encouraging social mobility. For instance, Manchester already has a 15:1 tenant to property ratio and the UK’s highest gross rental returns.

This demand for privately rented accommodation is driving an increasing demand for build-to-rent properties (properties designed and built specifically for renting, typically high-quality, professionally managed apartment blocks offering onsite amenities such as a concierge, communal roof terraces and gyms with a focus on the tenant) which deliver more affordable housing in, or near, economically successful areas. Whilst build-to-rent only accounts for a small part of the market today, it is growing. Worth £25bn at the end of 2017, up from £15bn at the start of 2016, it is forecast to be worth £70bn by 2022. There are currently over 100,000 purpose-built rental properties estimated to be in the pipeline.

At least three-quarters of tenants are living in properties managed by private landlords rather than those owned and managed by institutions. However there will be a shift in the proportion of ownership of privately rented accommodation with the increase of purpose-built rental properties which are largely funded by large pension and insurance funds, such as Legal & General, M&G, LaSalle, Grainger, APG, Aberdeen Asset Management, EDI Group, Westrock, Criterion Capital and Quintain, as they have the capital to develop large blocks of apartments. These will then be managed by a professional management company, providing the funds with a stable and reliable long-term income stream along with an increase in the value of their assets over time.

The Housing White Paper, published by the government in February, identified planning policy as one of the biggest hurdles for the housing sector at present, and the Government is now consulting on changing the National Planning Policy Framework (NPPF) to encourage more build-to-rent, including encompassing a broader range of sites. This will accelerate absorption rates and therefore increase the supply of homes.

This is positive for developers as build-to-rent allows them to tap into greater demand from different parts of the housing market as the private rented accommodation sector is different to open market property sales.

Hamptons International Research: What next for buy-to-let?