by Alexander Peace with quotes from Charles Ferguson-Davie
In any other market, it would be the dream situation.
There is a massive undersupply of rental housing, and it is getting worse. Private landlords are leaving in their droves, while no new stock is being built.
For anyone who can get schemes off the ground, it is the kind of structural driver that would have the most mild-mannered fund manager rubbing his hands with glee.
Or it would be, were it not for regulation, high interest rates and the viability knife edge. And while the case for build-to-rent – and many of the living sectors – is stronger than ever, it may take more than chronic undersupply to kickstart new development
What the stats say
The undersupply to the rental market is well documented. According to Molior’s latest residential report, just 5,900 homes will be under construction in London from 2028.
Nationally, the annual rate of growth in BTR units has halved, according to JLL, from 20% to 10%. With the current problems affecting the sector, this is not expected to improve quickly. The BPF’s own stats say the number of homes under construction has fallen for nine consecutive quarters.
At the same time, a considerable numbers of PRS landlords are leaving – or are expected to leave – the sector as the tax and regulatory burden become increasingly punishing.
Seb Verity, head of research at Allsop, said: “Our internal data points to a sector in major transition rather than total freefall, but the direction of travel is clear: smaller landlords are exiting, some larger professional landlords are cherry-picking assets from those disposals, and rents are likely to rise as total supply falls.
“How that plays out across different markets and price points is still far from clear. What is clear is that the PRS emerging from this regulatory upgrade will be more institutionalised and, for many tenants, more expensive.”
Though the data for this is somewhat sketchy, the English Survey of Private Landlords said in 2018 that 75% of landlords would re-let a vacant property. This proportion has since fallen steadily, to 68% in 2021 and 59% in 2024.
More recently, separate data from a major property agency found among 1,000 of its clients, 42% said they would not re-let next year. Half of those said they would sell assets, findings similar to those by the the NRLA of its members.
The Renters Reform Act, which is bringing in a host of new regulations alongside the tribunal system, is widely expected to lead to more landlords leaving the sector, while the number of renters remains at around five million, according to the ONS.
Far from a blank cheque
For builders, it’s a perfect storm of undersupply. “If you can unlock developments now, they will be very special, very rare, and especially attractive to the institutional investors that want the stabilised, income-producing best-in-class assets,” says Charles Ferguson Davie, CEO and CIO at Moorfield.
This means less competition for tenants during lease-up, not to mention less competition when it comes to a sale to institutional capital, which is largely targeting the most modern, low-risk stock.
Still, assuming rental growth over inflation is a dangerous game, so while it means developers can achieve successful lettings, it does not mean astounding growth above market levels. 2-3% is generally considered the normal annual increase, roughly in line with wage growth inflation.
“Rents are aligned to wage inflation, and that will be more muted,” says Ferguson Davie. “We set our rents at what people are paying locally, we would not assume a premium, though that does leave some upside potential if your product provides a better offering.”
New deal types
Against that better outlook, there remains all the other factors continuing to deter investment: high interest rates, high construction costs, high tax and more government policy.
Jacqui Daly, director at Savills, says: “The sector has demonstrated its ability to adapt in the face of rising costs, tighter regulation and viability pressures, but continued delays across planning and the building safety regime are holding back delivery. If build‑to‑rent is to realise its full potential as a scalable and reliable source of new homes, it needs a more supportive operating environment.”
While there is strong reason to build, the financial viability of schemes remains difficult, in some markets impossible. This is leading to more flexible ways of funding development.
“Our role as an investor is to provide solutions to developers,” says Ferguson Davie. “We are here to unlock these sites. In this climate, we look to strike JVs in a structured way to make the development happen. These arrangements are aligned in a co-investing structure, rather than just the traditional forward fund model, which is less flexible.”
Moorfield is not the only one looking for new methods to unlock development finance. Earlier this month, Green Street News revealed that Oaktree was exploring a listing for its built and unbuilt stock, hoping to tap into the public markets for its financing.
It’s a sign that in the admittedly grim framework, developers have found ways to stack up development.
“In investment management, before Iran it was Venezuela. Before that, tariffs,” said one investor. “We are moving away from low and steady interest rates, and everyone needs to get used to this in an unstable world. So actually, resi is well placed, especially as a stable, purely rental income stream aligned to inflation.”
The political question
The other big question mark is the government. On the one hand, a wall of new safety measures and policy is stalling investment into the sector. The Renters Reform Act, though its tribunals system, may be acting as a rent cap in all but name.
Danny Pinder, director of British Property Federation, said: “The rental market continues to come under intense pressure, with supply constrained and development challenging – exacerbated by entirely avoidable impacts of the incoming Renters’ Rights Act and renewed discussion of rent controls.”
Despite this, the government has insisted it wants to increase investment into the sector.
Earlier this week, housing minister Matthew Pennycook was adamant in parliament that he would not introduce rent caps, in response to calls from Green Party leader Zack Polanksi to further regulate the sector.
“If build‑to‑rent is to realise its full potential as a scalable and reliable source of new homes, it needs a more supportive operating environment”
jacqui daly, savills
At the same time, both the GLA and other regional authorities have anecdotally become considerably more liberal with grant money to try to turn around their dismal building record. Schemes with as little as 10% affordable housing are being topped up with grants to reach acceptable levels.
“The government could make or break the current opportunity,” said one builder. “There’s demand, but it’s a viability knife edge. If they cap rents and scare off investors, we could see even less building. If they make more grant available, without unreasonable affordable or clawback requirements, it could unlock a lot of new schemes, that we want to build.”
Interest in the Irish and Scottish markets, which have now clarified rental rules after years of undersupply, shows how quickly investors can switch on the taps.
Even with the global pollical shambles – or perhaps despite it – there is once again a growing case for development in the sector, though it looks like it will need government help.