Beyond London: why housing investors are leaving the UK capital

Soaring housing costs mean more families and young workers are tenants for longer

Money managers invested a record £2.4 billion in the rental sector in the first half of 2021. Getty Images

Investors looking to cash in on the UK’s resurgent rental housing market are ploughing their money into an increasingly popular destination: beyond London.

About 70 per cent of investment was put into developments outside the capital in the first half of this year as pandemic-weary tenants seek more space and greenery, data from Knight Frank estate agent showed.

Over the previous four years, only about half of those volumes went to regions outside the capital.

“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 past 12 months and has directly driven demand.”

Banks and asset managers are bolstering their commitments to the UK rental sector as soaring housing costs mean more families and young workers stay as tenants for longer.

Money managers invested a record £2.4 billion ($3.3bn) in the sector in the first half of 2021, an 80 per cent year-on-year increase. 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 could eventually become one of Britain’s largest private residential landlords, as it plans to buy 50,000 homes in the next decade. Meanwhile, Australian bank Macquarie Group is planning to invest more than £1bn in the UK rental sector.

As investors seek more opportunities, tenants are prepared to pay up for proximity to nature and larger spaces, amenities that 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 per cent, property website Zoopla said.

More workers are beginning to return to the capital as managers 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 are also helping to boost the market.

But the challenges of building in London include the high cost of land, affordability constraints for tenants and planning requirements, all of which add to the cost of potential developments. Construction has particularly suffered through the pandemic, with London recording the lowest number of new build-to-rent projects in seven years, data company Molior said.

“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’s new suburban build-to-rent business. “We’re not the only ones doing this.”