Big investors are investing in UK buy-to-let homes despite regulatory concerns

Authors: Iain Withers and Aby Jose Koilparambil

LONDON (Reuters) – Aviva, Legal & General and M&G are boosting their investment in UK rental properties, betting on long-term gains in a market where demand for housing far outstrips supply even as the new Labour government could introduce tougher regulations.

Institutional investment in the UK rental sector is starting to catch up and, according to Savills, it now accounts for just 2% of the total rental stock, compared with over 35% in Germany and the US.

The rental sector – which includes student accommodation and retirement homes – fared better than the broader commercial property market, which is struggling after a period of rising borrowing costs and changing working patterns.

“Investors are really interested in all the residential sectors. It’s a bit like a scramble for beds,” said Rebecca Shafran, head of alternative residential research at BNP Paribas.

Aviva, L&G, M&G and Royal London Asset Management have told Reuters they plan to increase their investment in UK buy-to-let homes by hundreds of millions of pounds.

Aviva Investors has invested £750m in the sector in the past 18 months and is looking to triple that in three to four years. The firm said its latest deal was with builder Barratt, which has delivered 101 buy-to-let homes in Cambridge.

Potentially tougher rent rules are a concern, but not as much as the fact that interest rates will remain higher for longer, James Stevens, head of real estate investment at Aviva Investors, told Reuters.

L&G is raising commitments from its insurance business and external investors to boost investment from 2025, said Dan Batterton, head of housing. Any move to control rents would need to be carefully considered to avoid putting off investors, he added.

Foreign investors are also targeting the UK, with US fund giants PGIM and Blackstone recently securing major deals. Although PGIM told Reuters that relatively low returns and high construction costs pose challenges.

Reform Act

Investors have broadly welcomed the new Labour government’s promise to “get Britain building again”.

Finance Minister Rachel Reeves pledged in her maiden speech on Monday that the government would overhaul planning laws and harness the private sector to build 1.5 million homes over five years.

But investors are also waiting for details of planned legislation that is expected to provide greater protection for tenants. The new rules are expected to be passed early in the parliamentary term.

“There is still a risk that the sector will potentially be subject to more regulation, particularly rent control, which could stifle capital flows into the market,” said Rick de Blaby, chief executive of Get Living, a developer of rental apartments.

One large overseas institutional investor, who wished to remain anonymous, said he had put investment decisions on London rental properties on hold until the rent cap policy issue was resolved.

Potentially tougher rent rules are a concern, but not as much as the fact that interest rates will remain higher for longer, James Stevens, head of real estate investment at Aviva Investors, told Reuters.

The UK Housing Ministry declined to comment.

Campaigners say there are compelling reasons to introduce rent controls in the UK, linked to inflation and wage growth.

“The market is clearly spiralling out of control and people are suffering,” said Conor O’Shea of ​​renters’ group Generation Rent.

PREFERRED SECTOR

According to data from industry association INREV, in 2024 the most popular sector for investment in European real estate funds was residential, with the share of real estate in their portfolios more than tripling over the decade, to 23%.

Knight Frank says investment in the UK build-to-rent sector will reach £2.6bn in the first half of 2024, the highest since 2016 when the firm began tracking the market.

“The biggest fear investors have at the moment… I’ll get to the point, is rent caps,” said Andrew Screen, head of residential capital markets at BNP Paribas. “I’m a big believer that if you want to reduce rents, increase supply,” he added.