Safe as Houses: Why Investors are Heading for the Suburbs

21 Oct 2021

By Jennet Siebrits

As the UK Build to Rent sector continues its rapid expansion, institutional investors are looking for new opportunities to access stock and diversify portfolios. With this in mind, investors have been keen to explore the opportunity of single family rental housing.

Although this subsector has been on the radar for some time, the pandemic has accelerated interest, as many tenants have traded their city lives of short commutes and café culture, for a home study and bit of peace and quiet. While some of this demand may be a temporary phenomenon, a substantial proportion was already established; nearly two-thirds of renters live in rural or suburban locations. And despite the huge market - at 2.9m households – only 10% of new BtR development has been in these locations. The bulk - 90% - has been entirely urban-focused, according to the BPF.

The volume of renters living in houses is partly being driven by a significant increase in the number of adult house-shares, and partly by the number of families, which has doubled over the last ten years. A significant proportion of these will prefer suburban homes, with additional space and wider community benefits, over smaller city-centre flats.
Underlying this is the fact that ‘Generation Rent’ is getting older; the number of 35-44 year olds who are renters has increased by 46% over the last ten years, according to data from the English Housing Survey. This brings with it a change in living preferences, as they ‘outgrow’ the small city centre flats.

As well as a broadening the demand base overall, older tenants also bring another dynamic: longer tenancies. Private renters aged 35-44 years old will typically stay in their rental home an average of three times as long as renters aged 16-24. For operators, this can lead to lower turnover, lower voids and lower gross to net. This, in addition to lower operational costs than traditional BtR, is all good for the investor.

To date, investment has focused on the development of new single family homes in the north and the midlands, largely reflecting the availability of opportunities to partner with developers, a more favourable price point and the chance to purchase at scale. It also reflects the substantial volume of family renters in these areas, especially between large cities such as Manchester and Liverpool. For example, nearly half of the renter population of Knowsley are families. However, there is clearly interest to explore more of the UK, especially in commuter pockets that already have sizeable family renter populations; Slough, Harrow and Barking and Dagenham, for example, have amongst the largest family renter populations in the country.

It is this depth of demand, together with the low levels of turnover, that lowers the level of risk for the investor, and helps create a steady, resilient income stream for the long-term. It is also easier to manage cost and risk within the development phase as well; product can be built out and delivered to the market in batches, rather than as a block of 300 flats. This also means a phased income, sooner, which inevitably helps the overall return.

It is unsurprising, therefore, that single family housing is attracting a significant number of new entrants to the market, as well as established BtR players that are looking to diversify their BtR portfolio, in terms of product, location and price point. With £680m already transacted or under offer this year, of a total market that is estimated to be around £650bn, it is surely time to finally dispel the myth that renters only live in city centre flats and embrace the fact that we are only at the exciting beginning of this rapidly emerging subsector. 

*(Based on average house price of £271,000 x 2.9m houses in prs = £650,400,000,000)

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