BTR: The questions over viability no-one is asking and the solutions that remain unannounced

Build to Rent (BTR) had a record year of investment in 2023 and investor interest remains in 2024 though this hasn’t converted into as many deals. Once you get through all the market hype about how successful this form of housing is, fundamentally it is still suffering in terms of viability – despite an improvement in yields.

Look under the bonnet of BTR developer share prices and significant falls are evident. Some developers are moving towards being third party operators of BTR only.

Why? Because there are so many challenges and so much uncertainty. To make BTR viable in the Southeast right now, we need yields to improve by 1% to 1.5% – not promising!  The 2023 Building Safety Act has added significant build cost to what is already an increased materials hike over the last couple of years, and we all know about the constriction in the supply of construction workers. This combination of factors has put huge pressure on viability on top of land values themselves.

Then we have co-living and single-family housing (SFH) which are yet to really make an impact: at least outside of London and the Southeast, despite the latter being over 40% of the aforementioned investment volume in 2023.

As we have now passed the new Government’s first full budget, there is also a risk that the sector will take a further hit thanks to CGT, IHT and SDLT, and we will see a further delay in both development and performance. 

Unfortunately, the lack of wider thinking (and, dare I say it, understanding of wider forms of housing and, indeed, real estate) means that with a laser focus on Affordable Housing, the Government perhaps hasn’t realised fully that other forms of housing will be required to meet the targets and solve the crisis.

In some cities like Bristol, affordable tenancies are being priced out by the lack of purpose-built living accommodation – be it student, senior, or simple rental.  Houses of multiple occupation (HMOs) that would usually cover the more affordable rents are being outbid by this influx of higher paying tenants thanks to this lack of supply, putting more pressure on council waiting lists, social and temporary housing.

The housing market is not defined by one type of housing or another, it’s a mix of tenures and always subject to demand v supply economics which flows from the top to the bottom and bottom to the top.

As such, 1.5m homes are required by 2030 but these cannot all be affordable. Real, viable development is needed to fund affordable housing. As we have said numerous times over the last few years, 40 or even 50% of nothing remains nothing.

Some typically BTR developers have talked about an ‘amenities-lite’ version of BTR. Perhaps this type of adaption is needed to make viability more possible – institutions can provide quality housing on market rents and not invest in the gyms, pools and wellness studios in favour of smaller and more basis co-working and common spaces. They won’t achieve the premiums most commonly associated with BTR developments and the discerning ‘lifestyle choices’ that BTR brands promoted in a bid to push rental as an aspiration but now that it is, perhaps this isn’t needed? A lifestyle choice today could be accessing a home that’s desperately needed on normal rents so that the affordable properties are viable and kept for those who need them? Perhaps the Government could incentivise the private development of these as we seek more and more forms of rental choice and to stimulate the overall market.

In lieu of magic solutions, however, what we need is certainty – that means no more uncertainty about tenant no fault evictions and potential rent freezing. In Scotland this has meant no BTR being started in Scotland at all this year.

Another solution would be to reduce CIL and s106 for BTR to help bring through much needed, institutionally-owned forms of intermediate housing, somewhere between the private sale and social housing. Whether this is amenity-lite or not, it’s key if we are to deliver units, fast.

Either way, BTR is a core sector that is fundamental to the success of the Government’s housing plan – we need to think about how to make it viable. That means adaptability and less punishment in the budget. The first is possible by developers, the second crucial by Rachel Reeves.