A recent survey from Cushman & Wakefield reported that institutional investors are prepared to pour £8.1bn into the UK’s build-to-rent sector this year, attracted by the market’s defensive performance and underlying structural trends.

In a time of market volatility, including high construction costs, rising inflation, and increased interest rates, the BTR sector still attracted £4.3bn of investment during 2023.

So why are more investors increasing their exposure to the residential sector?

At the end of last year, M&G Real Estate’s 2024 Global Outlook Report found that both the Private Rented Sector and Purpose-Built Student Accommodation Sectors were grappling with severe supply shortages in the face of growing tenant demand. This, alongside development pipelines easing in the face of higher costs, is likely to exacerbate existing imbalances, supporting strong rental growth despite a muted economic outlook.

Therefore, in the search for returns, investors who previously focused on the commercial sector, are increasingly moving across to the residential market as they look to navigate these challenging economic times.

Build-to-rent in particular has become a popular choice for many new residential investors. The product is beginning to grow in popularity amongst young professionals who are keen to enjoy city centre living but are unable to afford to get on the housing ladder. Meanwhile, greater regulation surrounding housing quality and energy efficiency, alongside increased mortgage rates, is seeing a mass exodus of buy-to-let landlords, further reducing rental supply in over-populated areas. This is only causing further growth in demand for high-quality, environmentally friendly living space.

Younger people have also been attracted to BTR schemes thanks to their strong amenity offer. Exclusive access to pool tables, cinemas, private rooms, balcony spaces, roof gardens, swimming pools, gyms, and even climbing walls are seeing people happy to pay more for better quality accommodation and live in these spaces for longer.

As a result of this continued demand from residents, investors are increasingly looking to either acquire or develop high-quality BTR stock. A recent example is Pembroke who made its first European residential acquisition purchasing The Lark in Battersea, home to 195 high-end BTR apartments.

Increased investment in high-amenity schemes is also evidenced by the Cushman & Wakefield survey which found that these were high on the list of preferred residential investment types among respondents. Location also ranked highly on investors’ lists with London zone 1-3 schemes the most popular choice, and prime regional cities such as Bristol, Manchester and Birmingham also ranking highly.

However, despite increased investment, Cushman & Wakefield indicated that it is likely that only a further 28,000 BTR units will be brought forward over the next few years, failing to resolve the supply-demand imbalance in the rental sector.

This is not only bad news for renters, but also an issue for investors looking to gain access to the returns which this sector offers. The high cost of financing construction and difficulties around the planning system mean forward funding can be expensive, meanwhile, current investors are unlikely to dispose of their assets due to the high degree of certainty offered by index-linked rental income.

Although all is not lost for investors looking to access the residential market. The dire need for housing across the whole living spectrum means there are plenty of opportunities to access healthy residential rental returns.

University cities such as Cardiff, Bristol, Leeds and Manchester are increasingly struggling to cope with continued demand for student housing. With universities struggling to fund further schemes, institutional investors have helped fill the funding gap by providing high-quality city centre schemes which have proved particularly popular with international students looking for high-end apartments. This continued demand and strong occupational certainty is allowing investors to tap into reliable returns.

Meanwhile, institutional investors are also helping to fill funding challenges faced by housing associations to provide more affordable housing across the UK. Investors such as M&G have partnered with housing associations to help forward fund shared ownership schemes, which have become an increasingly popular way for people to get on the housing ladder.

Investment in the shared ownership sector is anticipated to continue as not only do investors benefit from index-linked rental income, but they also gain access to house price exposure, as well as hitting social value targets by supporting the delivery of modern, sustainably designed, affordable homes.

Despite strong housebuilding pledges being promised by all political parties ahead of the upcoming general election, it is still going to be a long time before supply begins to outweigh demand. At the same time rental growth across the commercial real estate sector is expected to remain low, meaning we expect investors to continue to target the residential market as they look to access strong rental income.