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Is the Build-to-Rent Trend a Threat to Private Landlords?

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News today that Grainger, the FTSE-250 listed-company that is the UK’s largest listed residential landlord has reported a 2% rise in profits and 8% rise in rental income highlights a wider trend that private buy-to-let landlords would do well to take note of. Grainger’s positive performance has been put down to its steady transformation from a buy-to-let to build-to-let company.

Grainger’s history dates back more than 100 years, with the company founded in Newcastle-upon-Tyne in 1912. How the company has successfully adapted to property market trends since means the company can be considered a bellwether for the direction of the UK market for property rentals. Up until the late ‘80s and early 90s, Grainger focused on ‘regulated tenancies’. Regulated tenancies, a system that came to an end in 1989, at least for new regulated-tenancy agreements, meant that the tenant had a secured occupancy with rent also fixed and tied to inflation.

Grainger bought properties under regulated tenancy agreements, usually at a discount to market value of around 30%. Rent was collected from occupants and the property sold to the private market when the tenant died or left the property.

From the 90s onwards, Grainger transitioned into a standard buy-to-let landlord and over the past decade has gradually transitioned into build-to-rent. So, why should private individuals with investment properties be concerned about the rise of the build-to-let sector? In the UK, there is currently a pipeline of more than 70,000 build-to-rent property units, over half of which are in London, due to come to market over the next few years. 10,000 BTL units are currently on the market in London, 6000+ are under construction and another 24,000 are in the planning stage.

Institutional investors, such as Legal&General which has set up a build-to-rent fund, and big private and listed housebuilders are allocating significant resources to build-to-let investments. The attraction compared to build-to-sell is that build-to-let provides a reliable long-term rental flow and avoids much of the cyclical character of the home building market.

But what does this significant pipeline of build-to-rent properties mean for private landlords with investment properties also on the rental market? The good news is that the influx of cash from big business and institutional investors into the build-to-rent sector is confirmation that the long-term prospects for the UK’s rental market are considered by the professionals to be very promising. That is especially the case for London, where the majority of investment is currently concentrated and validation that the capital’s current property market slowdown is considered to be very much a short-term blip.

It does, however, mean that private landlords, especially those with investment properties in London and other big cities such as Manchester, Birmingham and Glasgow, will likely face increased competition in the years ahead. And it’s not just that big build-to-let investors will bring a lot of rental units onto the market. Because build-to-rent projects are usually whole buildings, at a minimum, and often complete complexes, investors can both customise the properties to the rental sector and take advantage of economies of scale. Super-fast internet connections, communal areas and amenities, and professional property management services that can respond quickly to tenants’ needs and emergencies can be expected.

Private landlords will have to up their game if they are to remain competitive, which is good news for tenants. It looks like the days of waiting 3 weeks for a landlord to deal with a broken-down washing machine may be over! However, the growing rental market that is attracting the build-to-rent business model, with ownership expected to become less common in future years and decades, should be good news for quality buy-to-let landlords.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul