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Private Rented Sector Growth & The Expansion of Build to Rent (Bisnow)

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Below is a summarised write-up of three broadly overlapping build to rent (BTR) panel discussions from a mid-May 2017 Bisnow event.  Drawing on both domestic and global expertise, the discussions covered a number of relevant topics from managing the sector´s growing pains, the future sustainability of the “wall” institutional funding driving progress in addition to some interesting operation-led feedback and discussions on the issue of affordability.

What Can the British Private Rented Sector Learn from the US?

Moderated by Mike Kavanau, senior managing director at Chicago commercial real estate brokers HFF, the comparatively smaller panel of the day started with Michael Ablon, Principal and founding partner at Texas-based PegasusAblon sharing his experiences of the developing build to rent (BTR) projects in the Dallas / Fort Worth areas.  Like much of urban US, this region has seen noticeable signs of densification and rising rental demand since the 2007/08 recession.

Ablon argued that more developments are embracing the “experience economy” paradigm that has gradually spread out from the West Coast.  Broadly aligned with the growth of remote and flexible working patterns, people´s use of housing in the US has become increasingly transient.  Contemporary build to rent developers have therefore become well aware that the success of their projects will be based on the ability to create frictionless and convenient living environments.  Referring to the smart phone as the “umbilical cord of the millennial generation”, Ablon commented how attentively blending the internet of things phenomenon into rental units offer has become increasingly common practice. The importance of customisation down to the smallest of details was also mentioned – examples include specific storage requirements, ensuring that there is trustworthy engagement throughout the tenancy as well as incorporating digital efficiencies and integrated processes to guarantee fast resolution of any repair issues.  Ablon´s view was that BTR developments that do not embrace such concepts may well struggle to minimise voids and build a solid reputation, particularly given the ever-stronger presence of social media / feedback forums and peer advocacy platforms.

On the ongoing debate of whether build to rent is a homeownership “aspiration destroyer” (as also debated at an Estate Gazette event in early May 2017), Ablon believes that the stigmatisation of renting continues to evaporate in America and it is not unusual for middle and upper classes to rent.  This explains why the multi-family sector has grown considerably.   At the same time, he highlighted the need for developers to constantly gauge signs of volatility whilst being cognisant of any given scheme´s position on the economic cycle.

Bella Peacock, managing director from Greystar agreed that consumers in London are choosing to rent and housing is becoming less “commoditised”, particularly in line with the growth of overlapping sectors such as flexible / shared office space.  Broadly embracing the US multi-family sector, Greystar´s Greenford (West London) development will aim to cater to a broader demographic.  Nonetheless, Peacock commented that how much the British BTR sector will replicate that of the US remains to be seen and the sector will need to find its own feet in line with both national and regional-specific demands. Peacock also highlighted how, while more research is coming out, the lack of trading data is making BTR underwriting more complex and the appraisal process is currently “both an art and a science”.

Placemaking (Mixed-Use and Mixed-Income Property Assets in London’s Current Political Climate)

Moderated by Clare Breeze – Partner at Macfarlanes, the discussion (with Ryan Prince – Vice Chairman at the RealStar Group, Richard Meier – Partner at Argent, Debra Yudolph – partner at SAY Property Consulting, Ed Crockett – Head of UK Residential at Aberdeen Asset Management, Barry Coltrini – Development Executive at Essential Living) addressed a range of topical issues on the evolution of the Private Rented Sector.

Richard Meier started the discussion by highlighting that while Argent´s development / regeneration plans in Brent and Tottenham Hale will introduce build to rent (BTR) objectives, somewhat regretfully, the model has failed to advance in areas like Kings Cross and the Greenwich Peninsular.  Particularly in these emerging higher end parts of London, in spite of BTR being aligned with several major pension funds desires to offset liabilities, the “challenging economics” is posing difficulties in bringing such schemes to market.

One interesting observation was that the cost balancing exercise is relatively different when assessing future cash flows and BTR land values are not residualised in the same way as build to sell (the former typically uses a discounted cash flow analysis and not back-end capital receipts / off plan sales in the appraisal process). Ryan Prince of RealStar also highlighted that, although there are some projects specifically covenanted for the private rented sector, BTR developers will almost always be outbid by traders who can achieve higher Gross Development Values (GDVs). Frustratingly therefore, with Permitted Development Rights (PDR) schemes arguably over-saturated, there has been difficulty in finding viable purpose and infill BTR projects.

Questions were also raised with regards to the issue of the private rented sector´s current focus predominantly at the top end of affordability barometer (as a result of assumptive yields that “simply do not work” for lower and middle income earners).  The sector will ultimately be judged 10 years from now and, to avoid BTR becoming a driving force behind “stealth gentrification”, schemes will have to incorporate a rational mix of rental uses that cater to a broader spectrum of people (readers may be interested in an article on this particular topic written by @ResiRichard entitled “Luxury London Renters – The PRS Premium Pipe Dream”).  Ed Crockett of Aberdeen Asset Management also pointed out that, despite the high land values and service provision costs, questions are being raised regarding the depth of the demand and rents may well be “out of kilter” with long-term trends.  BTR landlords, he argued, may have to drop their over-estimated rents in order to secure more durable income streams.

Mention was also made of the higher churn rates resulting in faster paced depreciation of the assets (there is likely to be more footfall and intense building use in BTR developments compared build to sell).  The challenge moving forward, therefore, will be achieving the balance of successful delivery, operational value and meeting investor return expectations.

In spite of the challenges, it was argued that mixed use projects – with a balanced integration of BTR units – will have an important role in any area´s placemaking strategy and could facilitate healthier absorption rates, reduce the risk of “sterile” communities and diversify risk.  The majority of Local Planning Authorities, particularly at the highly politicised committee level, still remain unconvinced about the BTR business case which will ultimately require more education on the real benefits and proven case studies.  Only then would lower stamp duty and VAT requests by the industry perhaps be taken more seriously.

Build to Rent – What Residents Want

The final panel of the morning, moderated by Richard Birks – Partner at DWF, saw Paul Cook – Managing Director at Dukelease, Julian Bell – Ealing Borough Councillor, Harry Downes – Managing Director at Fizzy Living, Alexandra Notay – Director at Places for People, Neil Young – CEO at Get Living London focus more on the practical aspects of build to rent operational management.

Reflecting on the market since the 1970s when London´s population stopped falling, it was observed how the overall standard of rental accommodation has gradually declined.  Echoing the previous discussions of the morning, renting has therefore almost always been a necessity rather than a choice and whether this paradigm will shift in the coming years will depend on how the build to rent (BTR) sector steps up to the plate.

Referring to the latest LSL Property Services Tenant Survey, Alexandra Notay from Places for People argued that consumer expectations from rental property remain quite low and the build to rent sector will need to “raise its game” from a professional standpoint and deliver good levels of service cost-effectively.  The survey also pointed to the cost of rent still being the biggest cause of concern and the question was raised as to how good standards of accommodation and service provision can reconciled with profitable business models.  Notay referenced some examples from the hotel sector that could potentially be transitioned into build to rent. Whilst tech will also an important role to play in tackling some of the management challenges that BTR schemes will face, care will need to be taken to avoid unintended consequences (over-investment in untested ideas, poor integrative capacity and obsolescence risks).  Bringing a further dose of realism to the discussion, Harry Downes of Fizzy Living also pointed out how there is a need to not “over provide” due to the importance of constantly being cost-aware (too much expenditure will ultimately affect net levels of rent).

In terms of overall affordability, Downes went on to outline how Fizzy Living customers initially had an average salary £30,000 with rent taking up 30% of income.  Today, however the average salary is £40,000 and rent is taking up 27% of income.  The average stay is 2 years and the management company is trying to raise this.  The average tenant age is 31 but in one project being developed in Epsom, the age range and mean salary is much higher.

Get Living, one of the fast growing developers in the space, has 6,000 units that have either been build, in construction or going through the planning process.  According to CEO Neil Young, schemes are increasingly being based less on age, demographics and other “millennial-centric” social metrics and more of what people actually require. Admitting that Get Living has previously been at risk of becoming too “Butlins-esque”, residents are being listened to more and, through regular surveys and optimum customer care-led service provision, the company has been learning about the intangible factors that can make a BTR scheme a long-term success.

Handling the skills crisis was also discussed as was need for the building industry sector to “modernise or die” (to extract the title of the Farmer Review).  BTR, it was argued, could work well with modular building technology and an increasing number of developers are already started to experiment with hybrid modern methods of construction (MMC) models – using bathroom and kitchen pods, for example.

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September 2019

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