(Bloomberg) --
Investors looking to cash in on the U.K.’s resurgent rental housing market are plowing their money into an increasingly popular destination: Beyond London.
Some 70% of investment was put into purpose-built developments outside the capital in the first half of this year as pandemic-weary tenants seek more space and greenery, according to Knight Frank data. Over the previous four years, only around half of those volumes went to the regions.
“The sector’s strong regional presence is rapidly growing,” said Oliver Knight, head of residential development research at Knight Frank. “Lifestyle changes, as well as a desire for more space, has been a feature of the rental market over the last 12 months and has directly driven demand.”
Banks and asset managers are beefing up their commitments to the U.K. rental sector as soaring housing costs mean more families and young workers are staying tenants for longer. Money managers invested a record 2.4 billion pounds ($3.3 billion) in the sector in the first half, an 80% increase from 2020. As demand for regional housing accelerates, the growing wall of institutional money is also coming up against a lack of project opportunities in the capital.
“London is more challenging from a development perspective” with fierce competition over a limited number of opportunities, said Jonny Stevenson, head of build-to-rent and funding at Knight Frank. As investors increasingly look to diversify, “more and more developers will be looking elsewhere.”
Lloyds Banking Group Plc could eventually become one of Britain’s largest private residential landlords, with a goal of buying 50,000 homes in the next decade. Meanwhile, Australian bank Macquarie Group Ltd. is planning to invest more than 1 billion pounds in the U.K. rental sector.
Just as investors scout for more opportunities, tenants are prepared to pay up for proximity to nature and larger spaces -- amenities which are in limited supply in central London. Annual rental growth outside the capital surged to a 13-year high in July, while the city’s values slipped by 4%, according to property website Zoopla.
To be sure, more workers are beginning to return to the capital as offices start to encourage them back to the office, with Zoopla seeing a “sharp rise” in demand for central London rental properties in recent months. International students have also helped boost the market.
But the challenges of building in London are heaping up. The high costs of land, affordability constraints for tenants and planning requirements add to the costs of potential developments. Construction has particularly suffered through the pandemic, with London seeing the fewest number of new build-to-rent projects in seven years, according to data company Molior.
“Why are we chasing outside of London? Well, at the moment possibly because you might generate a slightly higher yield,” said David Reid, managing director of Legal & General Group Plc’s new suburban build-to-rent business. “We’re not the only ones doing this.”
©2021 Bloomberg L.P.
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