Five takeaways from BNP Paribas Real Estate’s latest Capitalise event, where panellists explored why strong demand in the living sectors hasn’t yet translated into supply – and how investors can unlock opportunities.
The UK’s living sectors have a problem. Despite resilient tenant demand and growing global capital allocations, new development is stalling. Investors see a compelling long-term story – underpinned by structural undersupply, demographic growth, and rental resilience – yet many projects remain stuck in the pipeline, squeezed by costs, regulation, and uncertainty.
At Capitalise: The Living Edition 2025, hosted by BNP Paribas Real Estate, panellists from across the market unpacked the forces shaping this disconnect – and the strategies that could help unlock supply. Their discussion revealed five clear lessons for investors, developers, and lenders navigating the cycle: demand is strong, viability is weak, recovery will be slow, creativity is crucial, and opportunity still exists for those ready to act.
Lesson 1: Demand Is Strong And Broad-based
Investor appetite for the UK’s living sectors remains resilient. According to MSCI, the living sectors accounted for roughly 20% of all UK commercial real estate investment in 2024, with volumes of around £10.3 billion. That's since dipped a little; £9.3 billion has been deployed in the twelve months through June 2025, though the proportion of total investment is holding steady. Overseas investors now represent close to 60% of capital invested, as global funds continue to view residential assets as a defensive play amid economic uncertainty. Domestic institutions have become more selective, representing only 9% of activity.
Tenant demand tells a similar story of strong demand competing for limited stock. The data shows a deepening structural undersupply: housing starts nationally have fallen to their lowest level since 2016 (see Lesson 2). Meanwhile, the 20–39 age cohort in major cities continues to expand, sustaining demand for rental housing. International student numbers at top-tier universities remain elevated, adding pressure to purpose-built student accommodation (PBSA), while the ageing population is driving need for senior and later-living options.
Lesson 2: The Supply Picture Is Reaching Crisis Point
Despite abundant capital and clear tenant demand, new housing delivery is faltering. In London, according to Molior London, 23 boroughs recorded zero starts in Q2 2025, which will weigh heavily on completions over the two-year time horizon.
The causes vary. Build-cost inflation remains stubborn, eroding developer margins. Rising debt costs and thinner equity slices have widened funding gaps, making even well-conceived schemes difficult to launch. At the same time, regulatory drag is slowing progress: the introduction of Gateway 2 and 3 has added time and uncertainty for schemes above 18 metres. One panellist reported submitting a Gateway 2 application only to learn six months later that a single form was missing, which forced his project back to the end of the queue – a costly delay, emblematic of wider systemic issues.
The Gateway 2 issue has led some to avoid high-rise schemes altogether: "We don't want to have money tied up in projects where it's not moving forward," Mike Pegler, President, Europe, at Kennedy Wilson said during our panel discussion. "I think it's a significant inhibitor for investment."
Policy uncertainty compounds the problem. The forthcoming November Budget’s £30 billion fiscal gap has heightened expectations of household tax rises, while ongoing reforms – from the Renters’ Reform Bill to evolving net-zero requirements – add complexity and cost. Domestic capital, once a reliable source of forward funding, has largely retreated from development, leaving delivery increasingly dependent on opportunistic overseas funds.
Lesson 3: The Logjam Will Ease, Albeit But Slowly
Panellists agreed that relief will come, but not overnight. With inflation expected to have peaked at around 4% in September 2025, the Bank of England is likely to continue cutting rates gradually, aiming for a terminal rate near 3.5% in 2026. As borrowing costs fall, debt will become more affordable, and viability should begin to recover.
Meanwhile, the government may still address at least some of the regulatory barriers to development, helping investors gain a clearer view of the underlying supply–demand balance. Dan Batterton, Head of Housing, Legal & General Investment Management believes that current challenges are clouding investor judgment and obscuring opportunities:
“Over the next five years, demand will only accelerate – homes are leaving the rental sector due to regulation, taxation, and energy requirements, so more will leave than join," he said. "I don’t think today’s yields correctly reflect rental growth expectations. There’s upside if you model sensible rent growth aligned to wage inflation and affordability.”
Still, some key investors remain on the sidelines, which may delay any yield compression for at least six months, according to John German, Managing Director and Head of Living at Invesco.
“There are green shoots, but I don't see yield compression yet,” he added. There’s a “lack of UK capital coming into the market, like local government pension schemes, and all the pooling there, so yield compression in my mind isn't going to happen for at least another two-to-three quarters.”
Lesson 4: Creativity Will Be Rewarded
In a challenging market, innovation in funding, design, and strategy can make the difference between a stalled project and a viable one:
- Flexible funding stacks — Nada Jarnaz, Director, Development Origination at Maslow Capital, highlighted the importance of collaboration across the capital stack: “Oftentimes there’s an equity gap, and how to help bridge that gap – whether it’s by stretching the debt, which we do for the right sponsor, or trying to get some advance funding elsewhere - can be the key to unlocking viability. We’re also seeing some schemes that make sense with grant funding – without it, they don’t work.”
- Forward sales and deposits — Jarnaz also pointed to forward funding arrangements and advance deposits as tools to de-risk early stages, giving lenders and investors confidence to commit capital before completion.
- Adjusting product and design — Developers are reworking schemes to avoid costly delays, focusing on low-rise, low-amenity formats that fall below Gateway 2. As Mike Pegler put it, “We’re focusing on things that can actually get built – low-rise, low-amenity schemes, below Gateway 2. They’re quicker, more predictable, and match what renters can afford.”
- Buying built stock below replacement cost — For investors unable to make new development stack up, Dan Batterton pointed to the opportunity in existing assets: “You can go and buy up-and-built, four- or five-year-old BTR assets below build cost, take zero development risk, and just get on with providing homes for people to live in.”
Each of these approaches reflects a broader message from the panel: that ingenuity and flexibility can unlock progress even when traditional development models struggle.
Lesson 5: The Best Opportunities Lean Into Demographics
Despite near-term challenges, the panel agreed that a range of focused opportunities remain across the UK and Europe. Three themes stood out.
Single-family housing in good suburban locations offers scale and resilience, particularly as buy-to-let landlords exit the market. New purpose-built rental stock can fill this gap, providing simple, affordable homes without costly high-rise amenities.
Operational build-to-rent assets below replacement cost present an immediate opportunity. Acquiring stabilised schemes offers income exposure without development risk, allowing investors to benefit from rental growth while waiting for viability to improve.
Finally, Affordable Housing represents a compelling long-term play. The ten-year rent settlement of CPI + 1% supports predictable returns, while new entrants can build supply without legacy issues. With limited competition and strong social impact credentials, this segment combines stability with purpose.
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