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Focus on London´s Build to Rent (BTR) Sector

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Against a backdrop of London´s so-called “Generation Rent”, purpose-built, professionally managed developments look set to make notable strides in the coming years.  Advanced by various bodies such as the PRS Task Force, the Build to Rent (BTR) Fund and the PRS Guarantee Scheme, the sector is now firmly graded as an institutional asset class and increasingly viewed as having an important role to play in confronting the Capital´s housing crisis.

The wider London development industry has been monitoring the work of key players such as Fizzy Living, Be:Here, Dolphin Living, Miflat and Essential Living – observing how, amongst other factors, demand certainty combined with realistic exit strategies may result in BTR developments being less subject to the cyclical fluctuations that invariably characterise the build to sell sector.  With determinable future rental flows and project outcomes, forward funding by investors in search of long-term, derisked stability is presumed to be more likely.  Furthermore, as many of the projects are located in relatively central parts of the City, the benefits of long-term capital appreciation is creating a seemingly attractive overall package.

Yet, whilst reference is made to the continent and the US, the medium-long term prospects of the model have not had the chance to stand the test of time.  London BTR developers will still face the same industry-led constraints such as cost inflation, qualified labour shortages, amongst other speculative uncertainties.  Paying close attention to product design and procuring cost efficiency post-completion will also be of paramount importance.  Appraisals and feasibility analyses will therefore require a greater level of sophistication, driven by net operating income forecasting with a strong focus on life-cycle costing (durability of materials, low maintenance, wear and tear minimisation) and an array of operational aspects.  With the Urban Land Institute (ULI) recently pronouncing that the sector offers “not just a building product, but actually a service sector,” most developers will adopt bespoke configurations, fit out and spatial design according to the target clientele.  As a consequence, gross development costs could be higher – more akin to student developments with communal areas and on-site amenities such as concierge services, gyms, bars, cinema/TV spaces, games rooms etc.

Conversely, larger BTR schemes may benefit from economies of scale and other automated / modular construction methodologies that continue to gain traction as well as potential cost-effective supplier partnerships.  Where possible, developers may also be able to capitalise on future income generating activities such as the “Google-esque” collaborative workspaces that are increasingly popular amongst London´s freelance / start-up economy alongside other innovative placemaking strategies.

The financial success of a BTR project will depend on the value competitiveness of the underlying site. Many of the developments currently coming on to the market were acquired at the relatively lower price points of London´s post-crisis property cycle.  Irrespective of the impact of the Brexit decision on the land trading market, bidding wars with build to sell developers have been cited as an ongoing threat which is placing pressure on economic viability (traders, it is argued, are ultimately more likely to achieve greater gross development values).  Whether the institutional funders will allow for higher bids in return for lower net yields remains to be seen.  However, the more stable and long-dated income streams that the BTR sector presents are likely to be viewed more favourably – providing that the sector is allowed to develop sustainably.

BTR projects will also need to be stress tested against potential wage growth stagnation, rising interest rates, the “millennial mobility” factor (i.e. the fact that younger tenants may not want to commit to lengthened ASTs), competition with private landlords offering a more personable and “homely” service, localised oversupply, marketability issues, problematic tenants and other void hypotheses.  From a post-completion perspective, a well thought-out BTR development will need to balance profitability with high standards of professional management to ensure that ongoing reputational risks are not jeopardised.

Broader questions also remain in relation to over-arching affordability dynamics and whether proposed rental figures are aligned with real market demands.  To quote one example, a back of envelope calculation of a £650 per week two-bedroom Vantage Point apartment built by Essential Living in Archway, North London – quoted in the Placemaking Resource magazine  (£2,600 per month or £1,300 each for two people sharing) – is unlikely to be accessible to a young professional earning £30,000.  In this scenario, rent will consume almost 67% of take home pay of £1,946 (deducting income tax and NI contributions and assuming the asset management company covers the cost of utilities, council tax etc.).  Without casting aspersions, the threat of BTR developments in London´s inner zones becoming exclusive to better off social-demographic profiles is a serious one, particularly in an era of intensifying landlord demonisation.  All the benefits of living in sleek and efficiently-run buildings will undoubtedly come at a cost – most probably passed on to tenants.  Likely to be debated as the sector grows, questions remain as to whether residents will be willing to accept such premiums and if, in reality, the BTR lifestyle is ultimately compromising young people´s ability to save and eventually get on the housing ladder themselves.

For the developer, mispricing and low absorption rates would naturally be a disaster for annual lease turnover.  Sector-led initiatives are, however, proposing that in certain developments 20% of units are let at 80% of market rates for social tenants in return for a 3% stamp duty surcharge removal and other concessions, such as flexibility in space standards should a covenant be in place that the building would remain a long-term rental asset (i.e. not flipped to owner-occupiers).

Related to this, the Greater London Authority´s prioritisation of more “genuinely affordable” housing and London Living Rent requirements (rents consuming one third of average household incomes) may come into conflict with the BTRs largely private, open-market standpoint. Proposed projects in traditionally residential areas (in the outer zones of London, for example) may also come under “NIMBYist” fire at the planning stage and there may be some delay for local authorities to fully appreciate the benefits of exclusive developments for let who may, in turn, impose density controls and other restrictions – potentially rendering projects unviable.

Whilst Build to Rent´s maturation has prompted mixed feelings – from jitters amongst small-mid scale landlords as a further attempt to oust them from the marketplace through to those who are excited about what is being termed a “rental revolution” – it´s growth represents encouraging era for the London residential property industry. Improving standards and eliminating the proverbial “slumlording” and “beds in sheds” phenomena must certainly be welcomed and there is no real reason why the sector cannot exist side-by-side with well-run HMO, single let and serviced accommodation models.

Nonetheless wider homeownership will remain on the government´s agenda for the foreseeable future and, as mentioned above, the aspirations of many of London´s young to buy their own property should not be discouraged or drowned out by an aggressive expansion of the PRS.  Collaborative efforts between the BTR and the Help to Buy scheme, “rent-to-own” or other diversified tenure models could be possible “win-win” solutions to this potential clash of interests and all the more reason that the sector´s evolution will certainly be one to watch.

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