Europe's BTR boom

Changing lifestyle tastes and a lack of affordable housing have spurred a surge of interest in the build-to-rent (BTR) residential sector across Europe. Trends and prospects for the burgeoning UK and Nordic markets. By Paul Allen

The UK build-to-rent (BTR) sector saw a record £1.76 billion (€2.05 billion) in investment in H1 2022, an 11 percent increase on the previous year, according to real estate adviser CBRE. After record-breaking investment of £4.4 billion (€5.1 billion) in 2021, the sector is on course to match or exceed that this year.

Germany – where the share of private rental accommodation is near 50 percent of the total housing market – is by far the biggest BTR market in Europe, notes Stephen Screene, Head of EMEA Living, EMEA Capital Markets with Cushman & Wakefield. But other countries, including the traditionally owner occupier-oriented UK market, are following its lead.

“UK house prices remain unaffordable for a large proportion of the population, with rental the only other option,” Mark Clegg, Cushman & Wakefield’s Head of Residential Capital Markets UK, observes.

Drawn by residential’s ability to deliver strong, stable long-term returns, especially in times of economic shock and uncertainty, investors are flocking in. “UK rental stock shortage, a shrinking buy-to-let market, growing numbers of households and the affordability constraints of home ownership will attract investment into BTR for the foreseeable future,” Clegg says.

Denmark’s PRS sector has been the country’s most active property sector every year since 2016, reaching a market share of 61 percent in 2021.
Catherine Bai Senior Analyst EMEA Capital Markets, Cushman & Wakefield

Similar dynamics are at play in the Nordics. Total private rented sector (PRS) volumes including portfolio deals in Sweden, the region’s biggest PRS market, tripled in the past decade to €7.6 billion in 2021, notes Catherine Bai, Senior Analyst, EMEA Capital Markets at Cushman & Wakefield. Denmark’s PRS sector, which saw total recorded rental volume exceed €7 billion in 2021, has been the country’s most active property sector every year since 2016, reaching a market share of 61 percent in 2021, she adds.

Housing demand has been high in recent years, particularly in Nordic capital cities due to population inflows from less central regions and international trends towards urban living, Screene explains. Norway, Finland, Sweden and Denmark also have Europe’s highest percentages of one-person households. Add in land supply shortages and low new construction starts and the result is an ongoing imbalance of housing supply and demand. With housing prices rising much faster than rental growth, many aspirational first-time buyers are being priced out and pushed into the rental market.

Renting is becoming a lifestyle choice

“Stockholm will continue to be the region’s growth engine,” David Hutchings, Cushman & Wakefield’s Head of Investment Strategy, EMEA Capital Markets, notes. “The population and jobs are expected to expand by over 10 percent by 2032 and will be key fundamentals sustaining the BTR market.”

While buyer constraints are a major driver behind the UK’s rental growth, people are also changing how they live, says George Dyer, Head of Divestment at Watkin Jones, a UK developer and manager of residential for rent. “Buying isn’t for everyone. For someone who wants more flexibility, very little maintenance stress and better service with their home, BTR has a strong proposition.”

BTR may start to be seen as a more sustainable housing option, too, he adds. “The places we build are to institutional standards of sustainability, and ‘Fresh’, our management business, actively helps people to live more sustainably.”

These strong market fundamentals have translated into 14 percent year-on-year sector growth, with 225,352 homes completed, under construction or in planning across the UK as of Q1 this year. BTR developments have traditionally focused on London, where almost 43,000 homes were in planning in the first quarter. But the UK’s regions are experiencing increasing activity as well, with more than 63,000 homes now in planning.

Watkin Jones, the UK’s leading developer and manager of new homes for rent, is building Makers’ Yard, a BTR project, in the centre of Birmingham. It will include 551 apartments, plus communal areas and commercial space.
Watkin Jones (simulation)

Dyer points to growing demand in key regional cities such as Birmingham, Manchester, Edinburgh and Glasgow, along with good opportunities elsewhere. “Our scheme in Bournemouth was one of, if not the first, BTR scheme in a smaller UK regional city and Exeter is the site of our first fully co-living scheme,” he says.

In the Nordics, the capital cities and commuter towns around them have likewise been the primary focus of investors. The Covid pandemic has shifted the needle, though, reinforcing work from home and online shopping trends, while temporarily or permanently closing some city centre amenities and services.

“The pandemic resulted in a trend of moving from urban to suburban areas, and from capital cities to secondary cities,” Hutchings says. “In Denmark, for instance, the capital’s Hovedstaden region used to account for 70 to 80 percent of all PRS volumes. In recent years, this has been reduced to about 50 percent as investors entered regional markets, including Aarhus and the wider central Danish Midtjylland region, as well as Odense and southern Denmark.”

Emphasis on city centre multifamily BTR

The renter market is evolving, too. The BTR market historically targeted the 25–35 age bracket, with a focus on city centre blocks with good communication links to employment centres, Clegg says. Now a wider age group is seeing the appeal of a professionally managed apartment block that offers a range of amenities. “These include a concierge, package storage, organised events, rooftop gardens and co-working areas, all of which appeal to young and older tenants alike,” he notes.

The traditional emphasis on city centre multifamily BTR in the UK and Nordics is also being supplemented by strong growth in suburban and single-family housing. At present, 92 percent of BTR units are in urban locations, says Clegg. “But with buyers struggling to afford their first homes, we are likely to see a rise in older renters, many of whom will be looking for larger homes, outside space and good schools, which are all aligned with single-family housing.”

That could be a positive development from an investor/operator perspective, Screene observes. “Single-family homes may mean lower tenant turnover and voids, and less operational cost because there are fewer communal facilities such as lifts to provide and maintain.”

Within the single-family sector, Watkin Jones also sees an opportunity to be affordable housing-led, Dyer says. “This is a major focus for us. In areas like the northwest of England, where a huge need for affordable housing exists, there is the opportunity to offer a secure long-term return for an investor that very strongly hits both the E and the S of ESG.”

Strong fundamentals provide opportunities for institutional investors

For institutional investors, strong fundamentals in the maturing Nordic and UK markets offer the chance to invest in stock that will deliver sustainable and growing income over the long term, and act as a hedge against inflation. “The BTR sector proved its resilience during the Covid-19 pandemic, and is again likely to outperform other asset classes going forward,” says Friedrich Georg Warmbold, Union Investment’s Head of Investment Management Residential. “With the establishment of our European residential investment team, and an investment strategy aimed at affordable housing for middle and upper income groups in demographically-strong metropolitan regions of Europe, we are well placed to actively participate in this long-term trend.” 

Given a lack of existing BTR product, though, investors are increasingly turning to acquisitions from developers. Union Investment targets individual properties from €50 million and larger portfolios, with forward funding or forward purchase transactions, as well as existing properties of recent construction, being of particular interest.

“Investors are generally looking to enter the market at scale, and the only real options are forward funding or forward purchasing,” Clegg says. “We will see the first phase of BTR income-producing assets trading, but have only seen a small number to date.”

By Paul Allen

Title image: Watkin Jones (simulation)

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