The UK housing market remains a strong choice for residential investors seeking long-term returns, as confidence grows among institutional buyers.
With the private rented sector making up around a fifth of the country’s housing market, it makes up an essential part of the picture when it comes to the supply and demand issues faced by the wider property sector. As tenant demand continues to swell, rental homes are in extremely high demand across much of the country.
From an investment perspective, this looks unlikely to drastically change in the near term, as factors such as the cost of living crisis and high mortgage rates look set to deter some first-time buyers from the property ladder, meaning many are renting for longer.
The surging growth seen in the build-to-rent sector in the UK is one clear sign of the long-term outlook of the rental market for residential investors. These homes cater purely for renters, and generally those renters who want to stay in their homes for longer, and therefore want a higher quality property with better amenities.
While this niche part of the market is aimed more at institutional investors than individual residential investors (such as smaller buy-to-let landlords), its rising popularity among tenants is an indication of where the rental market is going – that is, towards higher quality offerings for tenants looking for a rental community.
Rising demand
According to research from trade body INREV, the top sector for investment for European real estate funds in 2024 was residential. The share of their portfolios in residential properties more than tripled between 2014 and 2024 to 23%.
Knight Frank found that investment into the build-to-rent sector in the first half of 2024 reached a record high of £2.6bn, and the trajectory looks set to continue in this vein with many thousands more developments in the pipeline attracting institutional residential investors.
The investment outlook demonstrates the expectation that tenant numbers could be set to grow, and this could mean more opportunities for residential investors to capitalise on this growth – particularly those that focus on the trend towards a better class of rental property to offer tenants, including new-build units in prime locations.
More institutional residential investors
Among the institutional investors looking to increase their investments in rental homes in Britain by “hundreds of millions of pounds”, according to Reuters, are Aviva, L&G, M&G and Royal London Asset Management.
Reuters reports that Aviva Investors has “channelled 750 million pounds into the sector in the last 18 months and wants to triple that within three to four years”, with its latest deal being with housebuilder Barratt for 101 rental properties in Cambridge.
However, private residential investors still make up a vast portion of the market, while institutional investors account for only 2% of total rented stock in the country.
Overseas residential investors also honing in
International residential investors have historically targeted the UK’s major cities for their long-term growth prospects. London used to dominate in this sphere, and while it remains extremely popular, large numbers of overseas residential investors have also been targeting some of the better-performing regional cities such as Manchester, Birmingham and Liverpool.
Investing in UK property is seen as a much more stable and predictable market than many alternatives, as it has historically exhibited strong long-term growth. Increasingly, growth in the rental market has also made UK buy-to-let a target among many residential investors, who can benefit from annual yields as well as capital appreciation.
On the institutional side, the likes of PGIM and Blackstone from the US have recently targeted the UK residential sector, striking big deals.
Upcoming changes
Rent controls are something that have been touted in the past by Labour, the party that now sits in government in the UK. However, Prime Minister Sir Keir Starmer has not covered this topic since he came to power, and there is no certainty around whether this would be brought in.
According to Andrew Screen, head of residential capital markets at BNP Paribas, rent caps are the “biggest fear” at the moment with investors, adding: “I’m a firm believer that if you want to reduce rents, increase supply”.
“We have still got the threat of more regulation potentially hanging over the sector, notably rent controls, which would suffocate capital coming into the market,” said Rick de Blaby, CEO of build-to-rent developer Get Living.
Stricter regulations are likely to come in the form of the Renters Reform Bill. This was passed through Parliament by the last government, but did not make it to law before Parliament was dissolved, so it remains to be seen how Labour will take this forward.
The party have been clear that they intend to scrap Section 21 “no fault” evictions, as per the bill, which has been cause for concern among some landlords and residential investors. However, much of the tightening of regulations is aimed at improving standards in the sector, which could be positive for landlords as well as tenants.
