A build to rent arms race?
The build to rent sector is now established and appears to have gathered substantial momentum. We are regularly assailed with statistics demonstrating how much and how fast the build to rent sector is growing and at the same time the volume of investment ready and willing to commit to projects.
Earlier in the year, Trowers & Hamlins held a roundtable in Manchester to discuss what more can be done to enable build to rent to compete effectively for the purchase of land against build to sell. We asked participants to develop their ideas unconstrained by the current legal and regulatory framework. The result was a fascinating discussion which drew on experiences from other markets where build to rent is more established, especially the US and Germany. There was also some discussion of the Government's build to rent consultation and the introduction of a new and specific affordable tenure.
Dustin Fjeld of Fjeld Consulting provided some examples of the experiences they had in the States as Multifamily developers (US equivalent of build to rent), competing to beat "condo builders". Examples of the battlegrounds were:
- Building more densely for rent, than for sale
- Utilising tax efficient structures – such as the US Real Estate Investment Trust modelling in the capital growth associated with a secondary market for the assets
- Extremely sophisticated data collection
- Real time pricing of rent in a similar fashion to airlines
- Using bulk buying power to drive down the costs of utilities and other services, e.g. satellite TV
- Complex provision of priced amenities in addition to rent, with a view to generating an extra 10/20% on top of basic rent
Ed Ellerington (Director - PRS at Grainger), provided some useful comparative input in relation to the German market where there was not as much focus on methods to extract more revenue from occupiers, but instead to leverage the building itself; for instance by doing deals to derive revenue from solar panels built into the structure.
Paul Belson (previously of the Government's build to rent taskforce and now consultant for LSL) referred to the survey that LSL had carried out of 37,000 renters in the UK. Whilst acknowledging that at this stage, the majority of those surveyed would not necessarily fall within the new build to rent Sector, it did still provide useful information. It indicated that on average, UK renters would only be willing to pay up to £50 per month in relation to extra amenities provided in their buildings/ developments. Premium rents would be available for "good landlords".
By comparison, the US market is extremely data rich with very detailed information available on all aspects of management. That information has revealed some facts that could be anticipated, such as renters who had made two or three new connections in the building were considerably more likely to renew their tenancies. Perhaps less obvious is that tenants with more work orders against their names were also more likely to renew. This demonstrates how landlords can do much to secure ongoing revenue by providing rapid and successful resolution of maintenance tasks.
The roundtable participants found the examples useful and the discussion turned to the current position in the UK market. Investors here are focussing on getting their initial buildings up and occupied. The expectation was that UK investors would want to be very careful about the reputational issues connected with seeking considerable additional revenue from amenities, but there was an expectation that this would become more normal as the market developed. There was a view that we, too, will use "big data", and that other benefits offered to tenants via the internet of things would rapidly become a new norm.
There was an interesting comparison between the way in which affordable housing is dealt with in the US, where regulation was mostly city by city, and the UK wide approach that we generally see evidenced by our planning guidance. Kitson Keen) Head of New Rental at Home Group) pointed out that the variety in the UK real estate market meant that homogenisation of the build to rent market was not the way to go. There is too much variety in the real estate market in order for that to be the best approach long term. We have already seen some areas in the UK where the value of land associated with development for build to rent has come very close to matching that possible by sale.
Whilst it was pleasing to see the Government focus on build to rent particularly via its consultation, Kitson and others were concerned that a one size fits all approach to the length of build to rent tenancies and the application of the proposed new Affordable Private Rent would not work across the country. Talented planning teams would be needed in order to navigate the rules and achieve good outcomes for their particular geographical areas. Investors would certainly welcome being able to maintain control of entire assets, rather than (for instance) having to lose a number of affordable units to a registered provider.
In conclusion, the participants found the experiences from the US of particular interest. In the context of the UK market, the general view was that a one size approach will not achieve the best result. Build to rent developers will need to pay great attention to specific asset-related data as it becomes available over the course of the next few years in order to shape their new proposals, maximising revenue and value in the secondary market when it is established.