London’s build-to-rent (BTR) market has taken a pause for breath. Both the number of sales to BTR investors and the number of schemes starting on site have fallen in recent months, according to data published by Molior London earlier this month.

The slowdown comes as the 31 October deadline for the UK’s exit from the EU edges ever closer. So are the figures a sign that investors and developers are spooked by Brexit or are they just a blip?

Get Living chief executive Neil Young believes nothing fundamental has changed.

“There are ongoing issues around viability in London – it’s difficult to make the numbers work, but I don’t think the long-term trajectory has changed,” he says.

He adds that on the ground, tenant demand remains strong. “We’ve had a good summer, especially in London. We’re getting rental levels we wouldn’t have got a few years ago.”

Savills residential researcher Lawrence Bowles agrees that the fundamental factors driving the market have not changed. “The demand from investors is still very much there, as is demand from tenants.”

We’re getting rental levels we wouldn’t have got a few years ago  

Neil Young, Get Living

He downplays the significance of Brexit, arguing that lack of capacity in the construction market is a more important factor behind the recent slowdown in BTR sales and scheme starts.

“Construction and planning capacity is contributing to the logjam,” he says. “Investors and developers are saying: ‘Let’s focus on our existing sites before moving on to new ones.’”

Alex Greaves, residential property fund manager at M&G Real Estate, which has several schemes in London, also believes the recent slowdown is a blip but he warns that planning policy changes could cause a more significant slowdown in the future.

Under proposed amendments to the London Plan, BTR developers would be forced to include traditional social housing in their schemes rather than homes let at ‘discounted market rent’. This housing would also have to be managed by a housing association or local authority.

“I think what you’re seeing now is a temporary blip, perhaps linked to Brexit, but there could be a bigger blip coming as a result of changes to planning policy,” he says, adding that it would take time for this to filter through and affect the number of schemes starting on site.

Confidence in rental growth

However, there are some positives for London’s BTR market. The latest Office for National Statistics data shows that rental growth has returned in the capital, albeit at modest levels. In the year to June, rents rose by 0.9%, compared with a 0.2% fall in the prior year.

Capital Economics predicts that rental growth will pick up further in the coming years. In a note published earlier this month, the research house forecast a 10% cumulative rise in London rents over the next three years.

It argues that rents will rise partly because of the falling supply of rental accommodation, caused by the retreat of buy-to-let investors, who have been hit by higher taxation and falling house prices. Rising wages in the context of years of flat rental levels are also expected to fuel growth.

Capital Economics’ forecast of 10% rental growth in the next three years is predicated on a no-deal Brexit being avoided. However, even in the event of a no-deal Brexit, it predicts rental growth of about 5%.

This bodes well for the future of London’s BTR market but planning policy changes still pose a major threat.