Inadequate levels of housebuilding, alongside a growing population and a diminishing pool of small-scale private landlords, has increased the demand for privately rented homes, especially in major cities. Consequently, providing much-needed rental stock to satisfy this need via build-to-rent (BTR) has become an increasingly attractive real estate opportunity.
By the end of 2016, four times as many BTR schemes were under construction or in the pipeline than were built in the previous seven years. There are currently 124,037 build-to-rent units either completed or planned across the United Kingdom, with just over 62,000 of these units in London.
As clear confirmation that the sector is gaining momentum, it is reported that BTR could deliver a total of 240,000 homes in England by 2030. This would create a sector comparable in value to that of US Multi Family REITs (the American equivalent of BTR), which is worth approximately £60bn per annum. By mid-2018, in London alone, there were more than 62,000 BTR units completed, under construction or with planning permission. With a current average monthly rent of nearly £2,100 per unit across London, this equates to an overall BTR rental income of more than £1.5bn a year in the capital.
While short-term property price growth is somewhat muted, historic trends show that the long-term prospects for steady asset value growth in new residential developments remains positive. This growth combined with the benefits of stable, long-term returns generated by rents make BTR an attractive investment option for sovereign wealth funds, asset managers, pension funds, local authorities and housing associations.
However, the sector also has its challenges. In addition to residential lettings being heavily regulated, the capital invested in any BTR project is tied up for a long period of time – sometimes up to 30 years. Revenue can flow quickly when units are occupied, but BTR is a long-term investment.
The advantage of the long-term nature of BTR is that the asset value of developments is less exposed to market downturns. The longer-term nature of BTR profit, however, means developers of schemes for sale often find themselves in a stronger position to bid for land.
The biggest challenge for those investing in BTR, though, is the lettings knowledge gap. Regular market intelligence and quality data is scant and just a fraction of the existing PRS stock across the UK, particularly in London, has been built specifically for renting. Therefore, optimising investor returns by designing a product for the demands of different tenant types remains a challenge.
Many of the large corporate BTR investors are looking to grow their product at scale and offer the end user – tenants – a consistent standard of property and service across different and multiple locations. If investors are able to achieve this consistency, it provides the opportunity to create brands.
By building a brand, not only can BTR owners forge trust and loyalty among existing tenants; they can also build a reputation among a wider target audience that will encourage potential tenants to actively seek out these developments as places to live. This level of trust is invaluable in a business scenario that relies on maximising occupancy rates and minimising tenant churn and void periods.
In a market where insight on trends is limited, particularly around tenant demand, how can investors begin to develop, maintain and manage a product that will create long-term success in the sector? To date, the only source of insight into the sector is fragmented data from the buy-to-let market. As a result there is little industry understanding about what different tenants want from a bespoke private rental product and how these needs relate to the cost of development, cost of management, terms of tenancy and rent levels.
Understanding a target audience in the rental market can be challenging, particularly in London where tenant demographics can vary from street to street, let alone borough to borough. The added complication for investors is that development location, size and feasibility is often dictated by the availability of land and local planning requirements.
When opportunities are driven by land availability, seeking expert advice and guidance on the rental market outlook for that particular location is crucial. It is critical to understand who the tenants driving the market are and what they are looking for. Unfortunately, there is no publicly available PRS data source that will provide a rounded understanding of demand for private rented property in a particular area.
KFH recently launched the only in-depth research into tenant sentiment across London. The annual appraisal of tenant sentiment explores tenant attitudes and expectations with regard to the private rented sector including their views on the market, their priorities when choosing property, and their expectations for the future.
We know, for example, that tenants in London expect to continue renting in the capital for another 4.2 years on average and that tenancy length is an increasingly important factor when making decisions on property. We have been able to form a picture of what tenants prioritise after factors such as location, property size and price have been considered and we know how this sentiment varies across boroughs.
Insight into tenant demand at all stages of the rental life cycle allows investors to structure their developments in a way that best caters for the market in which they want to operate. But an area often overlooked is the ongoing management of a BTR scheme or development. Not just the management of the buildings and units themselves, but the management and administration of the tenancies.
Of course, cost is important when evaluating the long-term returns on an investment; but poor management decisions driven purely by finances can actually have a detrimental effect on tenant sentiment and can increase longer-term management costs.
Expert insight and advice at all stages of build-to-rent development, from construction or refurbishment, to marketing, letting and ongoing management is the only way for investors to know they are making the most of their product – from creating an appealing development, to efficiency of costs and maximising income.
Our ongoing research programme combined with the expertise of our lettings agency branches, property and building management teams and portfolio managers built over 40 years, allows us to provide bespoke advice and service to BTR investors and developers. With BTR so critical for the future of the housing market, particularly in London, it has never been so important to plug the lettings knowledge gap.
Paul Masters is group operations director at KFH.