Build-to-Rent (BTR)

We expect the acute supply and demand imbalance across the rental market to worsen in 2024. This reflects the higher interest rate environment, with many private landlords selling their properties. This has also contributed to pricing uncertainty and lower levels of BTR investment. However, BTR operational metrics remain extremely positive and rent growth is strong.

Key Takeaways

1. The supply and demand imbalance across the private rented sector will continue to deteriorate in 2024. Already low supply is being further compounded by a mass sell-off of rental homes. This is a result of the higher interest rate environment, and previous tax changes, which has made buy-to-let increasingly unviable.
2. The number of BTR homes starting construction in 2023 fell to less than half the level recorded in 2022. This partly reflects subdued institutional investment into the sector, coupled with high construction costs, labour shortages, and more expensive debt. This will translate into a significantly lower level of BTR completions in 2024.
3. A persistent high level of demand and falling supply will continue to support a strong level of rental growth in 2024. Average rents increased by around 6% in England in 2023, we expect a similar rate of growth in 2024. The BTR sector will continue to outperform the headline level of growth.
4. The start of the economic recovery will boost investor confidence in 2024. This will be coupled with a more stable interest rate environment, which will offer a greater degree of pricing certainty. The reduced level of construction cost inflation will also improve the viability of forward funding opportunities. As such, investment into the sector will rebound strongly next year.
5. Yields will also be more stable in 2024. A further expansion is expected at the start of the year, but this will continue to be mitigated by strong rent growth resulting in only a minor adjustment.

Acute supply and demand imbalance to persist

Across the broader private rented sector, the supply and demand imbalance will continue to worsen in 2024. Higher interest rates and tax changes have made buy-to-let increasingly unviable in recent years, with many landlords opting to leave the sector. An estimated 150,000 rental properties have now been sold since the start of 2022, when the Bank of England began raising the base rate. 

In addition, BTR delivery is being hampered by high construction costs, labour shortages, and more expensive debt. New fire safety regulation, including the need for a second staircase in tall buildings, will also impact viability and the supply of BTR homes throughout 2024. The failure of several contractors, with the potential for additional filings in 2024, will also compound the lower delivery of BTR stock. 

Recent data shows that BTR construction starts in H1 2023 were less than half of the level recorded in the same period of 2022. This will result in a significantly lower level of completions in 2024. 

In contrast, demand from tenants will remain strong. The Royal Institute of Chartered Surveyors (RICS) continues to report an extremely high level of tenant demand across the sector. And our data shows consistently high occupancy levels, averaging 97% across operational buildings. Operators are also reporting strong lease-up rates.  

These factors mean rent growth will continue to be strong. The latest data from the ONS recorded average rents in England rising by 6% year on year, the highest on record. We expect a similar rate of growth to persist in 2024. And, as illustrated by our inaugural Multifamily Index, the BTR sector will likely outperform the broader headline level of growth. 

Figure 17: Net reduction in outstanding Buy-to-Let loans and Bank of England base rate

Source: CBRE Research

Pricing certainty will underpin investment in 2024

Our 2023 UK Investor Intentions Survey highlighted that appetite for BTR remained strong. The challenging environment negatively impacted investment throughout 2023, but this is expected to rebound strongly in 2024. 

As well as the positive return outlook, investors will be buoyed by the broader economic recovery and interest rate stability, which will provide greater pricing certainty. The viability of forward funding opportunities should also improve as construction costs stabilise, and inflation recedes. 

Investment activity could also be boosted by the significant number of stabilised assets coming to the market in 2024. A challenge is that these buildings will only contain one stair core, which shrinks the investor pool considerably. Albeit this may improve as greater clarity emerges on the new regulations. 

However, investors will need to be confident that we have reached the peak of the interest rate cycle, which means activity could be weighted towards the second half of 2024.

Overall, as at Q3 2023, there was an estimated £2.1bn of transactions under offer and £3.5bn of opportunities on the market. This provides a strong foundation to support investment activity throughout next year.

Figure 18: Net tenant demand and change in rents

Source: CBRE Research

Specifically, investment into Single-Family BTR will continue to be strong in 2024. Despite overall BTR investment falling in 2023, the Single-Family Housing (SFH) sector deviated from the trend, recording the highest level of investment so far. 

However, the sector could face challenges next year. Generally, investors are not taking development risks and are fully reliant on housebuilders to deliver homes. Currently, the challenging sales market is benefitting the sector as housebuilders aim to de-risk their schemes through a SFH strategy. However, this may change as conditions in the sales market start to improve in 2024. This could be a challenge for the sector meaning investors will need to find alternative routes to market. 

BTR yields, having expanded throughout 2023, will be more stable in 2024, particularly considering the interest rate outlook. A further expansion is expected in early 2024, but this will be limited and continue to be mitigated by strong rental growth. H1 2024 could provide a strong indication of pricing, as fund redemptions lead to the sale of several good-quality stabilised assets.