Build to Rent is the new (or not so new) buzz-word in the private rented sector (PRS).
The sector’s gestation has taken about five years and stems from a 2012 Government report by Sir Adrian Montague entitled “The Barriers to Institutional Investment in the Private Rented Homes”. Hot on the heels of the report were government funding initiatives: the“Build to Rent Fund” to kick start development, and the “Debt Guarantee Fund” to support schemes with stabilised income.
At this point we all started to think very carefully about exactly what sort of offer we wanted to deliver to the market. The PRS itself, largely made up of amateur landlords, didn’t have a great reputation, and the agents supporting the PRS had upset just about every tenant in the land. It was an adversarial relationship where the tenant was getting a bum deal and paying through the nose for the pleasure of it.
So what could we, in the Built To Rent (BTR) sector, do about it?
In the first instance we started to look at the building blocks; the buildings themselves. Surely we could design much better apartments that were conveniently located, were thoughtfully laid out with great amenity areas, that were easy and cost effective to maintain. Places people could enjoy living in, safe in the knowledge that their landlord was a huge institution whose investment strategy was to provide long-term security for their customers.
Sorry? Did I use the word customer?
Surely I mean tenant? No, I meant customer. You see, in the brave new world of BTR we talk of customers, customer service, amenities, apps, concierge services and a whole range of hotel like services to make life just dandy for ‘our customers’ I heard of one scheme where one could rent an Aston Martin for the day… Cool eh!?
Yes, cool, but pointless. The problem is that we’ve got a bit carried away with ourselves. On the crest of a rental wave believing that the more we offer, the more we can charge. And that’s just nuts!
Now clearly if we are incorporating light and power and heating + community charge into the headline rent, that’s one thing. That makes sense and the ‘customer’ can move in free from the worry of utility bills racking up. Maybe if we add in WiFi that’s good too because it’s essential. But club-rooms, cinemas, concierge, bars etc? All this additional space costs money and has to be recouped. And that means charging a higher rent.
This is where I have a serious problem.
And it’s a problem that a number of BTR developers/operators are going to have too. The rental market is particularly dynamic and that is principally because people will pay only what they can afford. If pricing gets to a level that is unaffordable, the market says ‘no’ immediately.
It doesn’t matter what toys or conveniences come with the flat, renting is a simple matter of being able to afford what’s in your pay packet; there’s no fancy financial jiggery-pokery to help you afford it in the way creative financing can help buying a property, it’s down to how many pennies you’ve got in your pocket each month. End of! The market dictates affordability, not the developer, operator or agent.
There are currently 70,000 BTR units being developed across the UK, Principally in London and the SE, but also a large number in the NW/NE Manchester, Liverpool, Newcastle, Leeds. That’s quite a number and it’s anticipated that perhaps this number may rise to 360,000 by 2030.
That’s a big chunk of real estate chasing premium rents in a world of decreasing affordability…
This, from my perspective, is worrying. Placing too high a premium on the value of the services and amenities offered is going to cause quite a bit of pain when developers find slow lease up and absorption rates, high degrees of churn and voids, and higher than average delinquency rates.
To get it right, BTR is a simple business: You design great efficient spaces close to good transport links with access to excellent local infrastructure. You make those spaces wonderful to live in and engender a sense of community. You offer great service (because great service costs nothing) and you make the process of renting a pleasurable experience rather than a nightmarish one. Finally, you make it affordable.
Don’t get me wrong, really great places to live will always command a premium over something less good, but not to the extent that many who have entered this sector think they will.
Time to get your slide-rules out chaps, you’re going to need to re-calculate your investment returns.
Richard Berridge is the Managing Director of Blackbird Real Estate and an experienced property consultant in large scale residential investment, Build to Rent and development sector.
He has worked across numerous sectors including agency, property development, timber frame, land acquisition and residential investment. Follow Richard on Twitter