Build to Rent

Yardi UK Think Tank

By Yardi Blog Staff on Jul 16, 2018 in News

Just a few years ago build-to-rent (BTR) was a rarely used phrase in the UK. Now it is one of the hottest real estate sectors around. A think tank of leading experts convened by Yardi and Property Week discuss the extent to which BTR has matured, the challenges it still faces and where the sector will go from here.

The Think Tank Panelists:

Andrew Cook – investment manager, M&G Real Estate (AC)

Lora Salomidou – product owner, The Collective (LS)

Rebecca Taylor – investment director, Long Harbour (RT)

Katherine Rose – director of data & advisory services, Prsim (KR)

John Dunkerley – chief executive and co-founder, Apache Capital (JD)

Russell Markou – head of PRS operations,Tipi (RM)

James Pargeter – projects director, Greystar Europe (JP)

Chair: David Parsley – contributing editor, Property Week (DP)

DP: How far along is BTR to becoming a mature market and is it now considered an institutional-grade investment?

JD: There’s a big difference in people’s perception of where they think it is and where it actually is. There are 110,000 BTR units under construction or in planning. I don’t think we’re really scratching the surface yet. I don’t think it’s as advanced as people think it is.

LS: The Collective has come from a slightly different angle to BTR and is focusing more on the consumer. The main reason we have got to where we are with BTR is because there has been a fundamental change in the expectations of consumers. The investors’ point of view is slightly different, but if we compare the return on investment from BTR to build-to-sell it is very different, because investors don’t have to manage the property – companies like us do it.

JP: It’s certainly not yet mature in terms of finished product, but there’s a lot in the pipeline and under construction, and I think the thinking and policy around the sector has also matured a lot in the past two years.

As well as being for those who choose to rent, there is a desperate need for BTR to fill the housing gap between those who cannot afford to buy and those who are not eligible for affordable housing. A recent survey found that 45% of millennial homeowners advise their contemporaries not to bother with home purchase because of the additional transaction costs and while they consider it an investment, the price of many homes has fallen in recent years. So an awful lot points towards the growth of the sector.

KR: People around this table live and breathe BTR. We understand it and what we are trying to achieve. But our tenant survey earlier this year showed only a third of people understood what BTR was. It’s not one mould fits everyone. We have to try and find what tenants want, rather than looking to replicate the US model here.

AC: The collective view is that BTR in the UK is very much a toddler learning to walk. There are still very few operating BTR assets. As a fund, we’re on version 14 of our BTR model. We spent two years trying to educate people about the sector. It was very difficult to raise funds through that period.

But as more people got on board, understanding what it was, more pension funds started to look at it as an investable asset class. We’re learning to walk, but there’s a weight of funds there to support it. We’re all still learning from one another. The real growth will be in the next five years, particularly compared to the fairly stagnant build-to-sell market.

RT: We’re where student accommodation was 10 years ago. We invest for institutions and pension funds, but it took us a long time to get them there. We’ve been investing since 2013 and our institutional fund only closed in 2016. Investor confidence is growing, but is not necessarily there yet. There aren’t enough assets to understand how they work from a cost perspective. Everyone talks about the magic 25% to net, but is that proven and is it the case?

RM: People don’t know what’s coming and soon, when the first big wave of BTR product is released to the market, the genie will be out of the bottle. Expectations will go up and we have to make sure customers know about the product.

DP: How can the market ensure more people understand BTR?

LS: One of the main reasons people don’t know what BTR is is because there is no platform for the product to be discovered. If we look at how people consume real estate today, they use the likes of Zoopla, but none of those platforms are optimised for BTR. There’s no way you can advertise what the product is. Once those platforms are in place people will know exactly where to look. We need a Zoopla for BTR.

RM: When I came into the sector from the hotel sector, I wondered why there wasn’t a sort of TripAdvisor for it. We should embrace bad feedback as it helps us learn lessons. Once that first wave of new product hits the market in a few years, expectations will go up, all these metrics will fall into place and the ones who provide the best service will win.

AC: It’s a trade-off. The product isn’t yet there to support such a platform. Competing with Rightmove and Zoopla on a marketing budget will be a difficult challenge in the next five years.

KR: There are people looking to launch such a platform and the sector needs it. But there’s not enough volume right now. It’s also geographical. There’s not enough in the same location to make it. What are you comparing it against?

JD: There is also an element that everyone has a slightly different business model. You don’t want to give away too much. We can talk about lots of things, but at the end of the day not many people have proven their business model in the UK.

RT: That’s why the next two years are key. The pipeline is massive.

DP: What are the risks to the market?

JD: There’s a potential risk in four years’ time. The elephant in the room is a possible Labour government and the implications of that.

RT: Rent controls would just kill the sector. It would certainly create nervousness.

JD: It wouldn’t kill the sector, but it would slow it down. All the institutions are aware of this and there’s still demand. But in four years’ time there is that risk.

AC: We owned residential up until the 1970s. What did we get out of it? Rent controls. The whole business case is underwritten on rental growth. We’re a pension fund and we’re trying to match liabilities and soon as you introduce rent controls you take away our ability to do that.

DP: Is the BTR demographic changing and will new products cater to different age groups?

LS: There are so many issues with generational thinking. It’s understandable why we do this as it is so hard to cater for such a large group of people, but generational thinking just doesn’t work. If you look deeper into the demographic there are as many differences as there are similarities.

RT: When you build a house for sale, you don’t say ‘my target market is 25-year-olds’. You build a house for sale in a market and you want to make it attractive to people in that market. It’s the same for BTR. In my building there are 19- year-olds and a 78-year-old couple. They all live there because they like the location and the building.

JD: In the US there’s a massive cross-section of all ages in BTR buildings. But there is a movement in older-living towards a rental product. We are buying sites where we are looking at two uses: a later living facility and one for younger people. I think that will become the norm. Older people want to see younger people and be part of a wide-ranging community.

KR: In our tenant survey, 43% of over 45s said they would consider a targeted BTR block for the over 50s, up from 35% last year. It’s a huge market. But to think the older generations don’t want to live alongside younger people is wrong. They do and it keeps them young. You need to consider some aspects such as mobility scooters, wider paths, greater turning circles. But it’s all about a flexible space where everyone can live together.

JP: I was a consultant on the first Fizzy Living scheme, about six years ago. We thought the customer would be straight out of university and were surprised it was a mix of people. They had some people in that younger category, but other people came in too. Instantly we realised it’s a mixed demographic market we’re aiming at.

DP: What do you want to see for BTR in the next five years?

AC: Planning policy needs to improve. I believe covenants are the way to go and I don’t believe in a separate asset class. We need a greater understanding from local authorities about what the offer is and its benefits to the community. Long-term institutional investment for the greater good is a great thing for a local authority.

KR: I agree. I think it should be a defined asset class, but with local authorities the key is planning.

RT: Uncertainty in the market is concerning, not just in our sector, but all sectors. But the sector has come on in leaps and bounds, especially in the past three years, and I think the next five will be an exciting time, regardless of what happens.

RM: We need to show what really works and we will be able to do that in a couple of years’ time when there’s more stock on the ground. When that genie comes out of the bottle and people realise what good BTR product looks like, we can begin to bridge that gap in knowledge about the sector.

JP: I’m heartened by the recognition of the need for this product and by the fact that politicians have finally recognised problems in the housing market that have built up over the past 40 years or so. I think it’s a very exciting period ahead for the BTR sector.

JD: From an investment point of view, any investment is a risk, but the opportunities are enormous. There are huge demographic changes going on in our society and there’s space for diversity in BTR – more so than in any other real estate sector. A change in government would bring challenges, but the BTR ship has sailed. There’s momentum in the market and it’s a long-term game; we’re looking 10, 15, 20 years ahead.

LS: We’re collecting lots of data to support the sector’s case and I feel it’s our responsibility to educate the authorities to help them see the value.