With the policy rate decision of the Bank of England behind us (5.25% unchanged), speculation has started about whether the first rate cut will occur in June or July. Governor Bailey has not made any commitment, clarifying that it will ultimately depend on incoming economic data.

Real Estate investors have been waiting for rate cuts for more than a year, hoping that lower cost of finance will increase liquidity and reignite capital growth.

Inflation has come back substantially from the pick of almost 10% touched in October 2022, but fears abound that the last mile (i.e. reaching the 2% inflation target) might be the hardest. Several factors are at play here, from labour shortages, war in Ukraine, tension in the Middle East, reshoring of production and energy transition.

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The UK 10 year Gilt certainly reversed the positive sentiment prevalent at the end of last year, and quickly repriced from 3.49% to 4.14%.

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The UK residential property market is the mirror image of the persistent high inflation and high interest rates, with rents continuing to rise and property values decelerating.

According to the Office of National Statistics, average UK private rent increased by 9.2% in the 12 months to March 2024, representing the highest percentage change since the UK data series began in January 2015.

Average UK house prices decreased 0.2% in the 12 months to February 2024, an improvement from the decline of 1.30% in the 12 months to January 2024.

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As usual, it is useful to show recent house price changes in the the wider context, to appreciate how resilient the asset class has been:

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In their latest Q1 2024 UK Built to Rent (BTR) market update Knight Frank noted a record first quarter for BTR investments which hit £1.3 billion, up 21% over the year, the highest figure for a first quarter.

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Quoting from KF’s report: Strong operational performance, ongoing investor demand and an expectation that rental growth is moderating to a more sustainable long-term position all support a view that yields will be stable through 2024. In total, the number of deals completed in Q1 across the UK market was up 55% over the year, while the average deal size was down 22% to £75.8 million.

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The UK’s BTR stock now stands at 109,803 completed homes with a further 63,240 homes under construction and 80,400 with full planning permission granted. This brings the total size of the sector to 253,443 homes completed, in development or with planning.

There are 5.7 million privately rented homes in the UK. Current institutional BTR supply caters for just 1.9% of that number, rising to 3.0% when you include what is currently under construction, highlighting the scale of the opportunity for investors. This supports  view that the UK has considerable scope for growth.

Based on current household growth projections, Knight Frank estimates that there will be an additional 263,000 households renting properties by 2030 . If  the BTR sector continues to add around 14,000 homes each year, as it currently does, the provision rate would only increase from 1.9% today, to 3.4% by 2030, underscoring both the need and the potential for significant continued growth in the sector. 

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10-15 years ago we saw the birth of the Purpose Built Student Accommodation (PBSA) sector. Today, we are seeing the birth of another sector “UK BTR”, a sector which will dwarf in size PBSA and rival other traditional commercial real estate sectors of Offices, Industrial and Retail.

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A boutique development of 14 residential apartments located in the prestigious legal district in Central London.

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