Build to Rent versus Buy to Let

Real estate has for so long been the jewel in the crown of UK investments. And it is easy to see why

As an asset class, it has performed remarkably well over a sustained period. House prices are perhaps the easiest and clearest indicator of that. In 1992, the average UK house price had just edged above ￡55,000. Fast forward ten years and by 2002 it had risen to ￡119,500, and ten years after that to almost ￡171,000. Today, the figure stands at ￡296,000.

It is healthy, sustained, and resilient growth – over the past 15 years it has come despite the global financial crisis, Brexit, a pandemic, and an unusually high number of general elections. In other words: property prices have continued to rise, unfazed by this protracted period of political, economic, and social turbulence.

Now, it is important to note that other assets have demonstrated a similar growth pattern since 1992. But perhaps the important factor here is that in the UK, bricks and mortar is built into the public consciousness – homeownership, real estate investment, and the general performance of the property market dominate discourse in government and the national media. Therefore, it is no surprise that so many people gravitate towards this asset.

However, there are marked changes in people's attitudes and engagement with the property market – tectonic shifts are underway in the investment landscape. ?

The declining appeal of Buy to Let

For generations, the de facto method of property investment was to develop a Buy to Let (BTL) portfolio: second, third and fourth homes that are renovated, maintained and rented out.

The appeal was clear – the investor receives their regular rental income (and rental prices have soared in recent decades) at the same time as watching the value of their asset appreciate.

BTL properties were also relatively tax efficient as an investment vehicle; from mortgage interest to property maintenance, there were many ways a landlord could lessen their tax burden.

Over the past six years, there has been a well-documented shift in this regard. Here are some of the noteworthy changes we have seen:

·??????April 2016: an additional 3% stamp duty surcharge is introduced for second homes.

·??????April 2017: a tapered reduction in mortgage interest tax relief is introduced, leading to its removal in 2021.

·??????October 2018: new regulations are brought in for Houses in Multiple Occupations (HMOs), including the minimum size of rooms.

·??????April 2019: the Government tables a motion to abolish section 21 of the Housing Act 1988, announcing that “private landlords will no longer be able to evict tenants from their homes at short notice and without good reason”.

·??????TBD 2022-23: a Bill will be introduced in the parliamentary session to abolish 'no-fault' section 21 evictions in the private rented sector.

These ongoing and tightening changes have deterred investors away from the BTL market. However, this is not an unintended consequence, the Government is hoping to free up more homes for homebuyers – they also, rightly, want to better protect tenants’ rights and increase tax receipts from the rental sector.

Yet, the result for investors is still the same. This summer, Shojin commissioned an independent survey of 690 retail investors in the UK (all of which have investment portfolios worth in excess of ￡10,000). We found that for 61% of respondents BTL investment has lost its appeal in recent years, following many tax and regulation reforms.

Indeed, many studies have underlined similar sentiment, with data also showing that many landlords are scaling down portfolios or looking to exit the BTL market altogether.

Build to Rent is on the rise

Tax complications and additional regulatory red tape are driving some investors out of the BTL market. But the allure of real estate itself remains strong, for all the same reasons outlined earlier – most notably, the strength and stability of the market, and the seemingly relentless upward march of property prices.

In fact, Shojin’s aforementioned research revealed that over half of UK retail investors (59%) consider real estate to be a strong asset class at present, with 51% citing the current supply and demand imbalance as a strong factor behind its appeal.

Two-fifths of investors (40%) said they would be inclined to invest in real estate without the complications that come with property ownership. Among those aged 18-34, the figure rises to 67%.

An increasingly popular avenue, property investors are now turning to Build to Rent (BTR) in favour of BTL. BTR simply refers to purpose-built housing designed for rent rather than sale. Student accommodation and blocks of rental flats or housing developments are typical examples.

Due to the supply-demand imbalance, the sector is booming. Over the next decade, completed BTR homes are projected to increase fivefold to reach 380,000 by 2032, worth an estimated value of ￡170 billion, according to recent research by the British Property Federation and Savills.

Accessing the BTR market

There are different ways that investors can access the growing BTR market, particularly as new platforms and investment providers unlock opportunities that were previously unavailable to private investors. For instance, through debt investment channels, individuals can invest in a BTR development alongside their peers, receiving regular returns on that sum.

Fractional investment into projects and developments, along with debt rather than equity investment, gives investors far greater scope to access the property investment sector. After all, a BTL property, as well as carrying tax and regulatory complexities, can require a prohibitively high upfront capital expenditure, which may not suit – or be possible for – some investors. The booming BTR market and the rise of fractional investment models, like Shojin’s, powered by fintech platforms are creating a wealth of exciting new opportunities.

Ultimately, it is the strength of bricks and mortar, formed through the perennial imbalance between supply and demand, that still holds such a lure over investors. The more democratic the property investment space can become, the better. We should celebrate innovation and the greater diversity it is bringing across the sector – long may it continue.

You can watch Shojin’s Masterclass – BTR versus BTL – here >