Capital Economics: Build-to-rent investment to slow down

Build-to-rent’s growth will slow down due to high house prices relative to rents and strong competition for land, research consultancy Capital Economics has predicted.

Last year investment in the build-to-rent sector reached a record £3.5bn, up from £3bn in 2019, Savills research shows.

This was boosted by a collapse in investment commercial assets like office and retail properties due to the pandemic.

However the house price to rent ratio in the UK makes grim reading. In 1995 house prices were 10 times higher than annual rents, while that ratio has now increased to 23 times.

The result means it’s more profitable to build and sell rather than build-to-rent, making it harder for build-to-rent investors to acquire land.

Andrew Wishart, property economist at Capital Economics, said: “Overall, there may be little to choose between BTR and conventional commercial property returns in the medium term.

“Nonetheless, given the uncertainty around future office and retail demand it makes sense that investors have devoted more attention to the possibility of residential investments.

“However, given the high house price to rent ratio, BTR development is unlikely to take off due to strong competition for land from traditional build-to-sell developers.”

Capital Economics said residential property returns are unlikely to outperform traditional commercial property returns, as they current offer lower yields.

Meanwhile, according to the research consultancy, large increases in residential house prices, which made up for lower yields, will not be repeated.

While low mortgage rates have already pushed up prices, mortgages are now so low they are unlikely to fall much further.

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