In this week's blog, we examine the sharp rise of the build-to-rent sector, something we anticipated, although admittedly not to the degree currently reported. A recent think tank report featured in the media outlet The Canary suggested that over 20% of all new builds in the UK are now institutionally owned rather than merely relying on institutional investment for their construction. This presents a potentially massive issue for the UK housing market because, when we look at other countries where build-to-rent has dominated supply, rental prices have escalated. This trend dilutes the competitive aspect of the free market and ultimately undermines renter rights. It may appear to be an easy solution for the government seeking answers, and in an industry focused on investor returns, it's difficult to overlook the appeal. However, a more effective mechanism could be developed to not only yield substantial returns from the construction of UK housing but also protect the market and support thriving UK businesses. Consider it a more sustainable approach, rather than simply extracting resources from the state, and that approach - is our sector.
So, let's recap on build-to-rent. To set the scene again, the UK housing crisis is deeply entrenched, characterised by a chronic shortage of affordable homes, rising house prices, and an increasingly inaccessible property market. In response, the government and private developers have promoted Build-to-Rent (BTR) as a potential solution. The BTR model focuses on the large-scale development of rental properties, typically owned and managed by institutional investors rather than private landlords. While it is often presented to increase housing supply and provide high-quality rental homes, BTR is unlikely to resolve the UK's housing crisis for several key reasons.
One of BTR's fundamental flaws is that it does not directly address affordability, which lies at the heart of the crisis. BTR developments are often concentrated in urban areas and cater to middle-to-upper-income renters rather than those in greatest need of housing. Many of these properties charge rents significantly above the local average, making them inaccessible to low-income households. Moreover, institutional investors prioritise profit, meaning rents are set at market rates or higher. Capitalism is not to blame here; it's the best system we have found to date. However, it must be tempered with a splash of compassion. BTR is primarily driven by institutional investors seeking to maximise returns rather than address housing shortages; the core financial viability and model of these projects depend on a dizzying vortex of higher rental yields, leading developers to target areas where they can charge high rents. This results in a concentration of BTR schemes in cities like London, Manchester, and Birmingham, where demand is strong, rather than in areas where housing shortages are most severe.
A better alternative is to encourage private wealth and institutional investors to finance peer-to-peer (P2P) lending for small and medium-sized enterprise (SME) property developers. This approach decentralises housing development, enhances competition, and accelerates the delivery of homes, particularly in underdeveloped or neglected areas. One major issue in the UK housing market is that a few large developers dominate the industry, controlling land and dictating construction rates. Unchecked BTR would worsen this issue. These companies often build at a rate that benefits their profit margins rather than addressing urgent housing shortages. By promoting private and institutional investors to finance SME property developers through P2P lending, a wider variety of projects could be delivered.
Unlike BTR, which often focuses on high-end urban rentals, P2P lending to SME developers increases housing supply across various markets, including affordable homes and suburban developments. Large developers frequently delay projects to maintain property prices and maximise returns. In contrast, SME developers have a stronger incentive to build quickly, sell, and reinvest, leading to a faster overall delivery of homes- all factors we have previously mentioned that negatively impact housing production.
From an investment perspective, we argue that P2P lending offers attractive returns without the ethical concerns associated with build-to-rent (BTR) investing. As mentioned, BTR investors rely heavily on ever-increasing rents, which can contribute to housing inequality and the displacement of lower-income tenants. P2P lending, however, allows investors to earn returns from property development without directly profiting from rising rents. Additionally, P2P lending offers more flexible investment options. Investors can select specific projects to fund, diversify their portfolios, and support developments in regions or sectors that align with their values. Institutions seeking long-term, stable returns can benefit from the relatively secure nature of property-backed lending while contributing to the broader goal of increasing the housing supply.
One of the biggest challenges in the housing market is that new entrants find it difficult to compete with established developers due to financial barriers, which is likely one reason our sector exists. A strong and coherent argument can be made that an unchecked influx of BTR opportunities reinforces this problem by concentrating power in the hands of institutional landlords rather than harnessing that power for the greater good, further limiting opportunities for smaller developers. P2P lending democratises access to capital, and we want to see the continuation of a democratic and healthy market to address these problems head-on.
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