The popularity of residential build to rent is sending shockwaves throughout the UK property sector. In this article, the Smith Partnership Commercial Property team takes a closer look at the residential build to rent boom and its implications for commercial property.
The explosive growth of build to rent is one of the most significant shake ups to have taken place in the property sector in recent years. According to the Office for National Statistics, an estimated 4.5 million UK households made up the private rented sector in 2017 – a 63% increase on the 2.8 million privately rented households in existence back in 2007.
With the above growth showing no clear signs of stagnating just yet, it’s little surprise that build to rent developers have been quick to react to changing market conditions. All things considered, the UK is in the midst of a residential build to rent boom – but what exactly does this mean for the commercial property sector?
What Is Build to Rent?
The term ‘build to rent’ refers to private rented residential property that has been specifically developed for rental purposes. In many cases, build to rent schemes offer significant investment potential through offering developers a long-term rental income. As such, many build to rent properties are funded by private investors as part of a wider property portfolio.
The Woes of Modern Property Ownership
There are many reasons why the popularity of build to rent has continued to take flight in recent years, with the rising cost of property ownership being one of the most significant.
While the cost of home ownership continues to pose challenges throughout many layers of the UK population, a 2018 report by The Institute for Fiscal Studies (IFS) showed that young adults are especially disadvantaged in finding their way onto the property ladder. With average house prices having grown approximately seven times faster than the income of young adults, it’s easy to see why more and more people are choosing to rent.
In reaction to the increased demand for private rented residential property, developers have been eager to step up supply. Unsurprisingly, this is especially the case across many of the major British cities, with London currently accounting for the lion’s share of build to rent in the UK.
What About Commercial Property?
The growing importance of residential build to rent inevitably raises questions regarding its potential impact on other areas of the property sector. In the wake of Brexit, the commercial property market has been undergoing its very own changes – many of which are relevant to the strength of commercial property as an investment opportunity.
Commercial property – which covers the totality of real estate used for business activities – has long been a favoured investment opportunity for property investors. Much like the property sector as a whole, Brexit has helped to drive increased uncertainty, with some segments of the market significantly outperforming others. Despite this, recent figures by Savills show that investment in UK commercial property continued to stand at a robust £62.1 billion in 2018.
The idea that investments in commercial property differ substantially from those made in residential property is far from new. For example, commercial properties may often involve a longer lease, offering investors income over a longer period of time.
The higher value of commercial properties often also paves the way for numerous methods of investment, whether that be through direct investment or through an indirect property fund made up of multiple parties. As such, commercial property investments are more complex in nature, often requiring the involvement of commercial property solicitors.
Differences aside, one could nonetheless argue that commercial property investors can take valuable lessons from current growth in the area of residential build to rent.
Commercial Lessons from the Residential Build to Rent Boom
Although the increasing cost of property ownership may represent less of a threat to businesses in comparison to individuals, the decision to rent flexible commercial property continues to be made by countless commercial organisations.
Initially, this had especially been the case for smaller and medium-sized businesses (SMEs), many of which lack access to the financial resources available to larger organisations. Since then, businesses of all sizes have followed suit. In recognition of that fact, demand for flexible office space alone is projected to grow by as much as 30% over the next five years.
If the build to rent boom has taught us anything, it’s that significant gains await investors who react successfully to market trends. As businesses are opting to secure more flexibility in the form of commercial property rentals, there may be significant room for commercial property investors to benefit from the very same developments that have helped drive residential build to rent.
No matter what the future of UK commercial property may bring, taking heed of current developments in the property industry is likely to go a long way in safeguarding long-term investment in the sector. In any case, all signs point towards diversification as a tried and tested characteristic of a successful property portfolio.
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