2022 was a record year for the UK’s living sector. Investment into the sector exceeded £10bn in Q3, fuelled by growth across build to rent, student accommodation and healthcare.

While the data for Q4 is yet to be revealed, JLL predicts that the total investment for the year could surpass the £13.8bn recorded in 2021. The strong appetite from investors and funders demonstrates the appeal of the UK’s living sector, which is capable of delivering institutional grade returns, even despite a challenging policy and economic climate.

2023 will no doubt present further challenges, with interest rates and inflation above target.

The UK’s living sector is resilient, however. Further potential can be unlocked, with developers, operators, investors and funders able to play a key role in addressing the nationwide housing shortage, with current demand far outstripping residential supply.

So, as the first deals of 2023 begin to take shape, experts from Shoosmiths’ living sector team investigate what might be in store for UK residential real estate this year.

Buoyant build to rent

Of the £10bn that had been deployed in the UK’s living sector from Q1-Q3 last year, build to rent (BTR) accounted for almost half of the investment, with £4.9bn entering the market. 

The level of BTR investment in Q3 2022 alone was double year-on-year, showing its appeal to investors, even during periods of global volatility. The market is expected to continue growing, with research from the British Property Federation and Savills showing that completed BTR homes are projected to increase fivefold to reach 380,000 by 2032.

While helping boost the UK’s rental sector, where more than 230,000 new homes are needed annually, BTR also has the ability to create communities of tenants whose willingness to utilise space and engage with neighbours goes beyond occupying a building.

For investors, funders and developers, BTR poses opportunities to tap into real estate returns, but also those associated with the facilities and services provided. As an asset class, it remains underpinned by capital value growth and the long-term returns that can also be realised should an investor choose to break up and sell parts of their portfolio.

Fallout from the Mayhew Review and its impact on later living

Nowhere is the UK’s housing shortage felt more acutely than the later living sector.

The recent Mayhew Review found that the UK is failing to adapt to the impact of an ageing population, with only around 7,000 retirement homes being built each year. This is in contrast to the 50,000 new units the Review outlines are needed annually.

Considering that the population aged 65 and over is expected to increase to 17.2 million by 2040, there is clearly a major demand and supply imbalance that needs to be solved. 

It is, therefore, critical that more is done to create later living homes in 2023 and the recommendations of the Mayhew report must be considered seriously, especially regarding planning and putting retirement housing on a level playing field with other developments.

However, the focus must not just be on increasing the amount of homes brought to market.

The idea of ageing and attitudes towards retirement are changing and developers and operators must balance delivering high quality homes and providing amenities that offer residents the opportunity to engage and socialise – supporting their health and wellbeing. 

Purpose-built student accommodation proves its resiliency

Another part of the living sector that is impacted by an undersupply of stock is purpose-built student accommodation (PBSA), where a shortage of 450,000 beds is anticipated by 2025.

Investors, funders and developers have a vital role to play in bringing forward new accommodation and helping meet the demand for beds. There are external factors that the sector is currently navigating to deliver the level of development needed, including rising utility costs and interest rates - making funding and operating PBSA more challenging.

However, as highlighted in Shoosmiths’ recent roundtable, the student accommodation market has overcome crises before. It is no stranger to volatility and, with a sustained demand for beds, the sector has the potential and track record to continue its growth, generating returns for those funding, developing and investing in PBSA.

Now the PBSA market has matured enough to no longer be viewed as an alternative asset class, the focus for 2023 must be on responding to changing student needs. That means bringing forward more quality, versatile and varied PBSA to the market – mitigating the risk of assets becoming stranded and of less interest to potential residents and investors.

Doing so will enable the sector to put itself in the strongest position possible for growth, including targeting the still largely untapped second and third year student market.

Landmark legislation

2023 will see the introduction of substantial new legislation covering the real estate industry, with its impact likely to be felt across all areas of the living sector and those operating in it. 

While initially receiving Royal Assent in April 2022, this year will see the implementation of many of the Building Safety Act 2022’s main provisions that are aimed at improving building safety across the built environment, with a particular focus on the residential sector.

One of the main changes expected to come into force this year is the introduction of a new stringent regulatory regime during the design and construction of higher-risk buildings. 

The new regime seeks to ensure building safety risks are considered at each stage of the design and construction of higher-risk buildings - defined as a building that is at least 18 metres in height or has at least seven storeys and is of a description specified in regulations.

Developers also now have less than 12 months to prepare for the new biodiversity net gain (BNG) requirements coming into force in England.

The legislation, set to be enforced in November 2023 as part of the Environment Act 2021, will require all new developments, bar a few exceptions, to deliver at least 10 per cent BNG. 

It is critical that developers understand this new legislation and the impact BNG could have on project viability, before then taking the steps needed to meet the new requirements, particularly for schemes likely to be consented from November 2023.

The Levelling Up and Regeneration Bill is also progressing through Parliament.

The Bill proposes a number of new measures that will change the planning system and how development is brought forward, including the introduction of a new Infrastructure Levy.

Secondary legislation is set to be laid out in due course; those operating across the living sector should pay close attention to this detail and how the new measures will work practice.