Home Property Australia What the UK’s build-to-rent boom can tell us about the asset’s future in Australia?

What the UK’s build-to-rent boom can tell us about the asset’s future in Australia?

  • March 13, 2024
  • by Property Australia
EY Partners Luke Mackintosh
EY Partner Luke Mackintosh

The UK BTR sector has grown exponentially over the last 6 years from 47,238 units in 2016, to 240,202 units in 2022 – which is +508 per cent growth.

And the market is still growing. 

According to Savills latest report on the UK BTR market, 2023 saw a total of £4.5 billion (A$8.7 billion) of investment, signaling the second highest year on record, following £4.6 billion (A$8.9 billion) in 2022.

Guy Whittaker, Head of UK Build to Rent Research, Savills said the sector has proved resilient. 

“The BTR market has seen continued growth due to the housing supply and demand imbalance and high levels of rental growth. This has led to inflation-matching returns while yields have proven comparatively strong,” he said.

The UK’s BTR stock surpassed a significant milestone of 100,000 completed homes, with a further 53,800 homes under construction. The future pipeline currently stands at 112,800 homes, including those in the pre-application stage. This brings the total size of the sector to 267,000 homes.

Luke Mackintosh, Partner, EY Real Estate Advisory Project Management said the 508 per cent growth between 2016 and 2022 takes into consideration the combined pipeline of completed units and those in the construction and planning phase.

“This is primarily due to the strong interest from investors and institutional capital, which started around 2016, and saw overseas capital enter the sector and the incentives offered to developers and investors.”

Mr Mackintosh said the BTR sector in the UK emerged post-GFC when there was substantial growth in house prices and rising mortgage costs, leading to an increase in the percentage of the UK population seeking to rent.

“A number of key events followed – including the Montague Review in 2012, which identified that institutional investment into the private rental sector was a way in which construction activity could be increased, and housing stock could be provided to make up the shortage in housing supply. Another key event was the £200 million Build to Rent Fund (later increased to £1 billion), commissioned by The Housing and Communities Agencies as part of a recommendation from the Montague Review. The fund provided equity finance to support the BTR market and increase investor confidence.

Source: EY

“Additionally, incentives were also provided to the sector including policy changes, where developers did not need to pay key infrastructure contributions; and tax breaks, such as lowering the tax rate on BTR investments and discouraging private investment in dwellings through penalties on vacant properties.”

Mr Mackintosh said a major stimulant in the sector was the ‘Debt Guarantee’ scheme in late 2014, which shows that BTR starts nearly doubled in the space of 12 months.

“There’s a strong correlation between BTR supportive policies and increases in the supply of BTR homes in the UK,” he said.

For Australia, Mr Mackintosh said the BTR asset class is important as it has the potential to increase housing supply at scale, at a time when there is an acute shortage of new rental stock.

“For Australia to grow the BTR sector, institutional investment is critical to prove the commercial model and create a liquid and viable investment proposition,” he said.

“Foreign capital, which dominates in the sector, is needed to underpin the growth of the sector in Australia. We need to classify the product as Commercial Residential and acknowledge this is a different asset class to traditional BTR.

“We also need to remove barriers such as Stamp Duty Surcharge; Land Tax Surcharge; treatment of GST in line with commercial residential assets such as PBSA; confirm MIT at 15 per cent with no requirement for affordable housing or 10 per cent with a five per cent requirement for affordable housing; and provide a Debt Guarantee Scheme.”