Our Thoughts
Mon, 07/10/2024 - 12:00
· 3 min read

Maturity, Liquidity, and Why Investors are Backing BTR

In just a decade, the UK’s living sectors have moved from a little-understood niche to ranking among the fastest-growing corners of European commercial real estate. 

At our recent Capitalise 2024 - The Living Edition conference, we outlined why that journey can teach us a lot about what’s likely to happen during the next five years, what threats lie ahead and why it probably pays to invest early. Here are the most important takeaways, condensed into just ten points: 

The living sectors account for a growing proportion of CRE investment. Combined, the sectors account for about a quarter of total investment volumes on an annual basis, which is approaching the previous peak set during the pandemic. We expect this to grow steadily (more on this in a moment).

But growth so far is really dominated by certain sectors. Particularly purpose-built student accommodation (PBSA), which at almost 400,000 beds, is the most mature by far. 

With maturity comes liquidity. Key events on the PBSA timeline (see below) provide clues for what the future likely holds for the other living sectors, particularly BTR. Key deals from overseas capital arrived as well-branded stabilised assets matured, including Blackstone’s £4.7bn purchase of iQ Student Accommodation in 2020 and the £3.3bn GIC/Greystar purchase of Student Roost in 2022.

The combined living sectors are now worth £7.2 trillion, which is remarkable given how nascent some sectors are. Senior Living is the largest by value, at £63bn, though that reflects only the leasehold and market rent stock and excludes the 71% of the market classed as social rent. The BTR sector is now worth £62 billion and has surpassed the value of the PBSA sector at £58 billion. The Single Family Rental sector is now worth about £6.8 billion and is likely to grow rapidly during the next five years.

But much, much more is needed. Every living sector is failing to match the growth in their relevant demographics. BTR construction starts have been in decline since Q4 2022. The number of homes under construction in London wilted by a fifth during the year to Q2 2023. Some 1.3 million people are on local authority waiting lists across England. New PBSA delivery is failing to keep pace with demand, and more than half the beds submitted for planning in Q1 2024 were in just three cities. 

Investors could plough about £57 billion into the living sectors in the next five years. And that’s only if the sectors continue to account for about a fifth of total volumes, as they did during the previous five years. 

But we’re likely to see much more invested. Attractive demographics are drawing investors to the sectors, but they enjoy are other tailwinds, such as the pivot away from tertiary offices, many of which will be sold and repurposed into other uses, some even into homes. BTR stock built four years ago is reaching stabilisation, opening up the possibility of sales. As those sales gather momentum, maturity and transparency will attract more investment. There is also a growing awareness of the social impact of the living sectors, and proposed planning reforms should enable an uptick in development as interest rates fall. 

The potential is enormous. In a perfect world – one in which planning eases, rates glide down and all shortfalls are met – we would see huge growth. The PBSA sector would expand to at least £98 billion by 2029, BTR would climb to £97bn, and the value of the Single Family Rental sector would soar 764% to £59 billion. Of course, we don’t live in a perfect world, so investors must account for political, regulatory, and economic risks, but whatever discount you apply for those, substantial growth is coming.

Regulatory risks hang over the sectors, but they present opportunities, too. The Labour government has ruled some of the more extreme policies floated over the years, like rent controls, but governments can be unpredictable, and the living sectors are reliant on supportive policy. That said, regulation is generally good for the living sectors. Renters reform and the drive to professionalise the broader rental sector should be positive for BTR and senior living investors. Done properly, rules bring structure and the confidence of investors, but they are challenging to get right.

Investors are backing BTR, for now. We asked our attendees to vote on which sectors they plan on increasing their allocations to in 2025 and BTR was the clear winner. More than a third of our audience plan on increasing their allocations to the sector next year, followed by PBSA at 23% and single family rental, at 20%. 

Maturity, Liquidity, and Why Investors are Backing BTR