What is Build-to-Rent? Benefits, Financial Model and Key Considerations

Build-to-rent (or BTR) are new build developments that involve constructing residential properties in order to rent them to tenants.

Investing in build-to-rent properties has several pros and cons. Build-to-rent properties are associated with longer tenancies, on-site management, and higher price tags, but also all of the usual pitfalls of private rentals.

If you are curious about build-to-rent, or interested in investing, this article is a great start. As proponents of the BTR model (and it’s potential to reduce emissions and fuel architectural innovation) WindsorPatania are always eager to share our knowledge about this subject.

In this article, we’ll take a closer look at the build-to-rent market, the benefits of the build-to-rent financial model, and how build-to-rent works in practice.

Jump to:

• What is build-to-rent?
• Overview of the build-to-rent housing market in the UK
• How does build-to-rent work
• Is build-to-rent worth it?
• How can I invest in build-to-rent?
• Build-to-rent investment and financial model summary
• Maximise your build-to-rent investment with WindsorPatania as your trusted partner

What is build-to-rent (BTR)?

Build-to-rent refers to residential developments that have been purpose-built for renting and sold to property managers or investors as opposed to individual homeowners. Tenants are provided with amenities and managed services that aren’t typically found in traditional rental properties, including communal spaces (such as parks/playgrounds), retail stores, and community events.

What is the difference between build-to-rent and build-to-let?

The terms build-to-let and build-to-rent refer to a specific type of residential property development, but the purposes and target markets are different. Build-to-let refers to the more traditional form of property investment where a landlord buys a property in order to rent it out to tenants. Build-to-let properties can range from flats to single-family homes and can be located anywhere. On the other hand, build-to-rent is a newer type of property development designed for the rental market. They are characteristically larger than build-to-let developments, offer a range of amenities to residents, and are usually located in urban areas. BTR developments prioritise the needs and preferences of renters, aiming to create a positive and hassle-free living experience, including offering flexible lease terms, streamlined application processes, and responsive management.

Why are build-to-rent schemes becoming so popular?

Build-to-rent properties have gained remarkable popularity for several compelling reasons, much of which can be attributed to the escalating demands of the rental market:

• Younger renters are unwilling to tolerate subpar living conditions with exorbitant costs and are looking for quality urban accommodation with accessible transport links.
• The rise of short-term and flexible work placements since the COVID-19 pandemic has made rentals even more appealing.
• Build-to-rent developments can also deliver flexible housing with a quick turnaround and lower costs that can address the current housing crisis and meet the needs of investors and partners alike.

Overview of the build-to-rent housing market in the UK

According to the British Federation of Property, there are over a quarter of a million build-to-rent homes in the UK, of which 88,100 are complete, 53, 487 are under construction, and 111,815 are in planning, while CBRE estimates that more than £11 billion have been invested in BTR in the last five years.

Supply has been rapidly increasing by over 50% per annum since 2015, making built-to-rent properties the fastest-growing sector in the UK real estate industry.

Examples of successful Build to Rent projects

Over the last few years, several successful build-to-rent projects have been completed across the UK. Here are a few case studies to consider:

Elephant Park

Lendlease and the Canada Pension Plan Investment Board (CPP Investments) partnered to create 900 new build-to-rent homes at Elephant Park as part of a wider £2.5 billion regeneration project in central London.

According to Stephanie Barbabosa, the Head of Built-to-Rent, International Operations for Lendlease, there is a significant shortage of quality rental housing in London, which is why Lendlease became involved in the project.

The rental homes are being managed by Lendlease and are designed to meet residents’ needs so that they can experience a “frictionless lifestyle within the heart of London”. The management team is available to residents 24 hours a day.

Stephanie explained, “It all starts with good design, to give residents everything you think they will need in a home in order to want to stay. It can be something as simple as integrated storage or slightly larger living spaces, so incorporating an extra piece of furniture, such as a desk, doesn’t eat into the room. This was an example of something we did bring over from the US, where it’s much more common for people to telecommute.”

The development created a 13,000 sqm retail area and established a large green space in the heart of London.

44% of the build-to-rent properties were fully leased in the first three months of opening, and interest from across the UK has continued to grow.

Fizzy Living East16

The Metropolitan Thames Valley Housing Association and ADIA launched Fizzy Living, a branded build-to-rent service, nearly a decade ago, and it’s been thriving since. Fizzy made waves by offering alternatives to traditional deposits and pet-friendly workspaces and by hosting house parties in the communal gardens during the COVID-19 lockdown.

MTVH sold their build-to-rent arm to Greystar at 4.9% above Red Book value in 2021, with an implied portfolio valuation of around £400m.

East16 is the eighth location in the Fizzy Living portfolio and its second in Canning Town. Amenities include the F Club, a multi-use space with co-working offices, a meeting room, a resident’s lounge, a games area and a yoga studio. There are also several pet-friendly floors and a washroom for dogs.

Within three months, 200 residents (and 30 pets) moved into East16.

How does build-to-rent work?

Build-to-rent properties are built with the aim of leasing to long-term renters instead of selling to buyers, which is why properties are designed with the renter demographic in mind.

Blocks of flats, for example, are traditionally designed to maximise sales of the final product, whereas build-to-rent properties are designed to maximise renters’ enjoyment and liveability. The developer or investor retains ownership of all the apartments, which differs from a traditional rental development where every unit in a block of flats can have a different owner.

Characteristics of build-to-rent communities

Build-to-rent developments offer longer leases (up to three years) and facilities, including gyms and yoga rooms, office spaces, dog-walking services, retail shopping centres, gardens and restaurants. Communal events are common – in one example, Fizzy Living sent a touring ice cream van to all of the properties in their portfolio, offering residents free Prosecco and ice cream to celebrate World Prosecco Day.

Tenants may also be allowed to paint walls and keep pets, and annual rent increases can be locked in from the very beginning, encouraging longer leases.

Is build-to-rent worth it?

Savvy investors need to consider the pros and cons of build-to-rent carefully, as with any investment, to determine if it’s worth their while.

Pros and cons of build-to-rent

From an investment standpoint, build-to-rent presents compelling advantages. It serves as a long-term investment, generating consistent rental income while concurrently appreciating asset value. This combination fosters a stable and high-quality investment environment that attracts those seeking non-volatile options. Build-to-rent’s success isn’t limited to London; it has proven viable in both urban and suburban locales with competitive land values. As employment hubs extend beyond the capital to cities like Manchester and Birmingham, build-to-rent takes advantage of these shifting dynamics.

Build-to-rent  projects exhibit a much faster time-to-market compared to traditional housing, aided by rental developments’ ability to avoid market saturation. Modular construction techniques further expedite this process, aligning with the demand for speed in the industry. BTR also embraces the future of technology, integrating smart building concepts that contribute to achieving net-zero carbon ambitions.

There are key benefits for residents as well. The concept of “work, live, and play” under one roof is a key draw, with community-centric designs and an array of amenities such as gyms, restaurants, green spaces, workspaces, and communal roof terraces to encourage long-term leases.

There are limitations, however. The build-to-rent industry has primarily targeted younger individuals and professionals, often neglecting the needs of families. Family-oriented units have been relatively scarce, potentially excluding a significant segment of the population that could benefit from rental options. However, there is potential for developers to expand their offerings in the future to include more family-friendly units that cater to a wider range of individuals who find renting more financially suitable than buying.

Effective building management and maintenance are crucial for maintaining the long-term value of build-to-rent developments for landlords. Unlike other forms of property ownership, build-to-rent projects require consistent upkeep and management to ensure the quality of living spaces and amenities, which results in higher maintenance costs.

Profitability of build-to-rent

The initial entry costs of BTR schemes are high as investors need to finance the purchase of the site, the design and planning, construction costs and the cost of setting up the infrastructure and running the development. However, the growing need for housing, the availability of government schemes and long-term rental income will offset this cost.

As Alex Greaves of M&G Real Estate said to the BPF, “From an investor perspective, BTR is highly defensive in terms of cash flows, provides consistent returns for investors and offers clear opportunities to create low-carbon homes and ESG-led rental communities. We continue to explore new investment opportunities across the UK and can only see the sector growing in strength over the next decade.”

How can I invest in build-to-rent property?

Small private investors can’t invest in a BTR property directly, but property developers, large landlords, institutional investors and others can directly invest in a BTR scheme. Another alternative is to invest in the shares of a construction or development company that operates in the BTR market or by investing in a product such as BTR REIT.

Build-to-rent investment and financial model summary

There is a diverse range of investment models tailored to accommodate various investor preferences within the BTR sector, including:

• Equity Investment: Investors have the option to directly acquire equity in BTR projects. This can be achieved through individual ownership, participation in investment funds, or purchasing shares in a listed Real Estate Investment Trust (REIT) such as the PRS REIT. This model grants investors ownership stakes in BTR properties, enabling them to benefit from rental income and potential capital appreciation.
• Development Phase Finance: Investors can choose to invest throughout both the development and operational phases. This model involves providing upfront funding to cover expenses related to site acquisition, construction, and initial operational costs. In return, investors receive a fixed income stream (if utilising debt finance), which typically commences once the development becomes operational. Investors may receive a return of their capital upon eventual sale.
• Forward Funding: This model allows investors to limit their exposure to the construction phase by engaging in a forward funding arrangement. Investors contribute funds for the construction up to a predetermined amount and commit to purchasing the completed development at an agreed price. This occurs once the development reaches a critical stage, ensuring reduced risk for investors during the construction process.
• Take-Out Funding: Investors seeking to mitigate construction phase risks can opt for take-out funding. In this approach, funding is provided by the investor after the development has surpassed a critical construction phase. This strategy allows developers to recover their initial capital, minimising risk for the investor and ensuring that the project progresses smoothly.

Valuating a BRT property can be complex and is typically based on net income capitalisation. This involves benchmarking against an ungeared internal rate of return (IRR) over a span of around ten years. The value of individual dwellings can be considered on a unit-by-unit basis, known as their break-up value.

Build-to-rent properties often offer unique services like concierges, parcel delivery, and amenities such as gyms, which generate additional income. The valuer also needs to assess factors like location, specification, dwelling size, current rents, and additional features like parking spaces.

Valuers must think creatively if there are no direct comparables nearby and should analyse the performance of BTR properties in other locations. Considerations like the length of tenancy, supply pipeline, and rental restrictions are also taken into account.

Maximise your build-to-rent investment with WindsorPatania as your trusted partner

The success of every build-to-rent investment hinges on the design: creating an aesthetically pleasing living space in a prime location that attracts and inspires long-term residents. WindsorPatania’s proven ethos of combining traditional craftsmanship with contemporary design, as well as our commitment to creating modern, environmentally responsible buildings.

WindsorPatania can guide investors through every step of the process as they embark on their build-to-rent investment journey, including the initial new build development appraisal. During this appraisal service, we focus specifically on the feasibility and viability of property development projects, particularly in relation to architectural aspects and compliance with planning regulations, so that you can make informed decisions about potential projects. The appraisal includes a thorough assessment of various factors, including site analysis, building regulations, planning regulations, materials, and design solutions.

Our experienced team will gladly guide you from initial planning to construction, ensuring a smooth design development process. Our services are feasibility studies, architecture, interior design, and project management for various types of residential projects, including new builds and renovations for the BRT industry. Sustainability is close to our hearts, and will form part of every BRT project we undertake.

We have successfully worked with various City Councils and offer interior design services as well, a valuable resource for any BRT development. Find out more about our services.

If you are interested in developing a build-to-rent property of your own, book a free discovery call with us to discuss your project.