UK Cities DNA | What role can the living sectors play in the success of cities?
With more than two-thirds of the current build-to-rent pipeline located outside of London, housing and residential development are fundamental to the economic fabric of any town or city.
4 minutes to read
Key takeaways
- Housing and residential development are fundamental to the economic fabric of any town or city, as a driver in their own right and a vital complement to commercial property, e.g. through nurturing and retaining talent.
- Regional markets are crucial, with more than two-thirds of the current BTR pipeline located outside of London.
- Lower land values, less competition from the sales market and more attractive entry yields make for a compelling regional investment case.
- But understanding local demographics and need is key to determining the right types of homes (e.g. BTR, PBSA, Senior) that need to be built in the right locations.
The UK economy has a productivity problem, having experienced significantly slower productivity growth than comparable countries since the Global Financial Crisis. This issue weakens economic resilience, particularly at the local level, as seen in cities like Birmingham, Glasgow, and Manchester, where productivity growth has stalled compared to London and similar European cities.
All major towns and cities across the country are undergoing economic evolution, often particular to that geography. On the one hand, this is leading to changing requirements in commercial property requirements. On the other hand, it presents opportunities for residential development – and potential bridgeheads and cross-over between the two.
Adequate and well-located housing is vital for attracting talent, supporting the economic fabric of any city. This paper explores the role living sectors—including purpose-built student accommodation (PBSA), private and affordable rented sectors, and senior housing— play in supporting productivity and growth.
Investment
The last few years have seen an increase in institutional capital being allocated to the living sectors, driven by desire to meet growing demand and tap into areas of strong potential income growth.
Accordingly, across the UK, investors spent more than £10 billion acquiring or funding assets in 2023, Knight Frank data shows. Build to Rent (BTR) led with £4.6 billion spent, followed by PBSA (£3.4 billion) and seniors housing (£2 billion). Promisingly, within those figures, investment into regional markets, and cities in particular, has been rising.
The appeal of regional markets is clear. Lower land prices, less competition and attractive entry yields make for an attractive investment proposition. However, with housing affordability less of an issue outside London, the right demographic needs to be in place, and at sufficient scale.
Addressing housing need across all ages
Rising regional investment is also being reflected in development volumes. There are over 95,000 units in the BTR development pipeline, and more than two-thirds of these developments are located outside of London. BTR supports younger tenants in the early stages of their careers, with over 25% of multifamily tenants aged 26-30, aiding employment growth.
Accommodation plays a huge role in student retention. Knight Frank’s Student Accommodation Survey, conducted alongside UCAS, identifies that over 50% of university applicants cite accommodation influencing their university choice. Yet, the market remains supply-constrained. Fewer than 17,500 PBSA beds will be added to supply in the 2024/25 academic year, despite the student population increasing by 470,000 in this period.
In the seniors housing market, age-appropriate housing in urban areas is increasingly important. Older consumers already account for 54% of UK spending, likely to increase to 63p of every pound spent by consumers by 2040.
Supportive policy is key
Chronic housing supply shortage in high-demand markets is constraining economic potential. Encouraging private capital investment is crucial to delivering the right mix of long-term homes that towns and cities need.
The Labour government’s ambitious target of building 1.5 million homes over five years requires a near 50% increase in annual housing delivery. Living sectors can and will play an important role in achieving this goal – in 2023, delivery across student, BTR and seniors housing amounted to 43,000 homes.
Analysis of the development pipeline suggests there is scope to increase capacity, although this requires a step up from current levels, and comes amid a challenging development environment. In total, there are 160,000 student beds under construction or at some stage of planning, 146,000 BTR homes in the pipeline and just shy of 54,000 seniors housing units.
The real estate sector has an opportunity to improve the quality of homes available across the breadth of the UK. As people re-evaluate their work/life balance, so too are they looking at their housing requirements. A desire for greater flexibility, combined with a challenging ownership market, means that the rental sector has never been more critical in supporting local economies.