SFR: The investment opportunity

By Samantha Kempe, Co-Founder and Chief Investment Officer at IMMO

The single-family rental (SFR) market in the UK is undergoing a significant transformation. Traditionally dominated by new-build housing developments and large-scale apartment blocks, the focus is now shifting towards existing properties. This shift is driven by the need for energy-efficient, secure, and affordable homes, and is underpinned by the increasing use of data-driven strategies and innovative technologies. 

As investors seek to balance the benefits of new builds with the opportunities presented by existing properties, the SFR market is poised for substantial growth and evolution.

The shifting landscape of SFR investment

For years, institutional investment in the UK's residential real estate sector has primarily targeted newly constructed, large-scale apartment blocks or housing estates designed for renting. This trend was fueled by the predictability of new builds, their alignment with modern living standards, and their potential for high returns. However, there are long-term planning challenges that restrict supply and construction costs have continued to rise over recent years. As more capital chased fewer opportunities, a noticeable shift has begun to emerge.

In 2023, PGIM Real Estate, part of the US$204.4 billion investment giant PGIM, acquired a substantial portfolio of UK single-family homes from Goldman Sachs Asset Management. This portfolio, comprising 918 rental homes across 15 schemes in Manchester and Liverpool, perfectly encapsulates the strategic pivot towards standing assets. Adding to this trend, in February 2024, Citra Living, part of Lloyds Banking Group, acquired a significant portfolio of 558 single-family homes across the South of the UK from Annington Homes for approximately £150 million.

These strategic acquisitions demonstrate institutional investors’ growing commitment to affordable rental housing within existing neighbourhoods and communities, moving beyond new-build schemes. This shift not only addresses the pressing need for quality housing but also aligns with broader environmental and social goals.

New builds vs. existing properties

When considering the investment landscape of single-family rentals (SFRs), it is essential to weigh the benefits and challenges of new builds versus existing properties.

New builds are constructed with the latest building regulations and sustainability standards in mind, ensuring they are energy-efficient and meet contemporary living requirements. As a result, they typically attract higher rental yields and demand less maintenance in the short term, reducing operational costs for investors. However, the cost of land, materials, and labor has been rising, exacerbated by recent global events such as the COVID-19 pandemic and the crisis in Ukraine. This pressure can make new developments financially unviable without substantial public subsidies. Additionally, navigating complex planning regulations can delay projects significantly. 

On the other hand, retrofitting existing homes drastically reduces the embodied carbon compared to new constructions, and upgrading existing structures significantly cuts down on the carbon emissions associated with building materials and construction processes. Existing properties can be upgraded and brought to market more quickly than new builds, addressing the urgent demand for quality housing without lengthy construction timelines. Moreover, retrofitting can be more cost-effective than building new homes, especially considering the rising costs of new construction. However, many properties may require extensive renovations to meet modern standards.

By balancing investments in new builds and existing properties, investors can strategically address the housing crisis while promoting sustainability. Retrofitting offers a path to quickly enhance the quality and energy efficiency of existing homes, while new builds remain crucial for expanding housing supply to meet future demand.

The role of technology in SFR investment

By leveraging advanced data analytics and digital tools across the investment value chain, the single-family rental (SFR) market can be transformed, enhancing efficiency and sustainability in investment strategies. This starts with using sophisticated workflow automation to streamline the process of sourcing, acquiring, and valuing properties. This automation significantly reduces the time and effort needed to assess thousands of units across diverse locations, ensuring quick and accurate identification of investment opportunities.

Predictive modeling and AI-driven analytics further enhance the investment process. By analysing data on property age, historical energy usage, and potential energy savings, platforms like IMMO prioritise retrofitting projects with the highest potential for energy efficiency and carbon reduction. This data-driven approach ensures investments are directed towards properties that offer the greatest financial and environmental returns.

The journey ahead demands innovation and collaboration. So as we embrace data-driven methodologies and cutting-edge technologies, we can unlock the full potential of the SFR market, ensuring a future where investment success and social responsibility go hand in hand. Institutional investors have a unique opportunity to lead this transformation, driving the market towards a more sustainable, inclusive, and profitable future.

IMMO’s approach highlights how to transform residential investment strategies, making them more efficient, sustainable, and aligned with modern living standards. By focusing on both new builds and the revitalisation of existing homes, investors can create a balanced portfolio that maximises returns and contributes positively to societal and environmental goals.