The rise of private equity in the rental sector

Structural changes are afoot in the UK’s private rented sector, with institutional investors, namely private equity firms and pension funds, entering the market at an unprecedented rate. While international behemoths such as Blackstone, KKR and Carlyle had previously invested primarily in large-scale build-to-rent developments in major cities, there has been a marked shift in the past couple of years. We are now seeing an influx of capital into single-family homes, traditionally the domain of small buy-to-let landlords. With these landlords already beset by mounting regulation and a higher tax burden, will this prove their demise? Institutional investors zero in on single-family homes The UK’s build-to-rent housing stock currently stands at over 100,000 units, the vast majority of which are in urban apartment blocks, just over half of which are located in London. These developments are typically designed to appeal to young professionals, with communal lounges, gyms, co-working spaces and rooftop terraces all popular features. Despite rapid growth, the proportion of private rented sector stock that is owned by institutional investors is still just 3%. However, between supply constraints and lack of affordability preventing first-time buyers getting on the property ladder, institutional capital is expected to continue to flow into the sector with private equity growing its share. As reported in The Financial Times, institutional investors purchased almost 5,000 single-family homes in the first three quarters of 2024, an increase of 20% from the same period in 2023. Deals to buy or build these types of properties hit £1.5bn by the end of September, more than three times the amount deployed in the whole of 2021 or 2022. One notable example is Blackstone which, since late 2023, has purchased 4,500 rental homes from UK housebuilder Vistry across two deals worth £1.4bn, taking its total rental portfolio in the UK to 17,000 units. So, what is driving this shift? Single-family homes typically attract longer-term renters, offering greater stability and predictability in income, whereas large apartment blocks are associated with high turnover. Moreover, investors are discovering that obtaining planning permission is much more straightforward for single-family homes than large-scale developments with hundreds of units. The financial firepower of private equity firms – which are able to purchase large volumes of homes, often in all-cash offers – gives them a distinct advantage over small buy-to-let landlords who have been squeezed by higher mortgage costs. The Renters Rights Bill will unduly impact smaller investors One could argue the writing has been on the wall for some time. The financial upside of being a landlord has diminished considerably since George Osborne took an axe to tax relief on mortgage interest payments and imposed a stamp duty surcharge on purchases of investment properties, which subsequently rose from 3% to 5%. The sector is now facing greater regulation in the form of the Renters Rights Bill and the abolition of section 21 “no fault” evictions. Switching all assured shorthold tenancies onto a single system of periodic tenancies, which would roll on a month-by-month basis, has been a contentious aspect of the bill. Some landlords have argued this lack of certainty could leave them exposed to lengthy void periods. There is little doubt that institutional investors with vast financial and legal resources will be better equipped than small buy-to-let landlords to navigate this new regulatory landscape. They can spread compliance, maintenance and management costs across sizable portfolios, leveraging economies of scale, making it easier to weather additional costs associated with complying, not just with the Renters Rights Bill, but also new energy efficiency standards set to come into effect in 2030. Is this really the end for small buy-to-let landlords? The influx of institutional capital into the single-family rental space and the Renters Rights Bill are arguably just the latest steps towards the professionalisation of a sector that now favours portfolio landlords. Those who self-manage one or two properties will struggle to keep their heads above water and many will decide to cash out. So where does that leave those who decide to stick it out? Amid rising costs, stricter regulation and increasing competition from large-scale investors, landlords will need to be agile and savvy. Many of the young professionals entering the workforce are coming from professionally managed student accommodation, which means they expect high standards, both in terms of the quality of housing and the levels of service they receive. Landlords who want to attract good tenants and avoid lengthy void periods will need to ensure they maintain their properties to a high degree and respond to queries from tenants in a timely and professional manner. The market is maturing at a rapid pace, but smaller landlords with the right strategies still have a part to play. Antony Antoniou, chief executive officer, Robert Irving Burns Photo © Geoffrey Swaine/Shutterstock