Monthly Archives: August 2019

BTR Ecosystems Part II

Last week, in Part 1 of this two-part series, we talked about the ecosystems within the overall Private Rented Sector market place.  This week we take a look at the business ecosystems that operate within a larger BTR scheme. Many operators now see the minimum size of a BTR scheme as well above 150 units. Moreover, they would prefer schemes of 500 units and above. In the States it is not uncommon to see buildings with in excess of 1,000 units. In the UK, complexes like East Village and Wembley Park now boast more than 3,000 residences.

 

The sheer number of occupiers, all on individual leases, inevitably means that there will be a spread of rents achieved, on similarly configured units, due to timing of letting and market conditions, even within the same building or complex. What kind of spread should an operator look for?

 

Voids are a necessary lubricant for growth

 

In any scheme or village, there will be a number of voids or vacant units. Conventional wisdom says that the manager should minimise these but more experienced operators appreciate that these represent the oil in the machine that gives the opportunity to continually refresh the units and set new rental highs, improving the general rental “tone” of the building. In addition, there are new businesses like Staykeepers and Lavanda who offer to actively manage very short term rentals at premium rents using accommodation platforms like Airbnb and Bookings.com. This can be on behalf of the operator or, indeed, on behalf of the resident with the operator's consent. This adds another dimension to a part of the BTR schemes rental offering. At the other end of the scale, there may also be longer leases which sit at lower rental levels for some time but which can have a positive impact on the overall risk profile.

 

So management becomes a balancing act and the profile of rents across the scheme or estate will resemble the spectrum of rents across the market that we saw last week. But there will be a normal or stabilised rent which will predominate and set the tone for the scheme. Around this there will be some who are benefiting from lower rents and some who are sitting at higher levels. 

 

How much of your scheme should sit at the normal or “stabilised” rent?

 

Multifamily operators in the States are quite willing to accept a void rate in a scheme in excess of 5% of total units in order to refresh, renew and set new rental levels. They are also comfortable to have only 60% to 70% of their occupiers paying the stabilised rental level. Much more than this and they start to feel that they are undervaluing their asset; much less than this and they worry that they are overvaluing the accommodation and that they risk losing occupiers if the market moves against them.

 

One multifamily operator in the States who achieves these thresholds gave us a very good insight to the profile of his occupiers. In his experience, he would normally expect to want to actively get rid of some 10% of his occupiers at any point in time because they were proving troublesome in one way or another. At the other end of the scale, he would describe 30% of his residence as “Happy as Larry” and likely to stay under most reasonable circumstances. Inevitably, another 30% would be looking to move but due to changes in their own life-circumstances like job changes, marriage or new or growing children. This leaves the remaining 30% being the floating occupiers who would consider moving on purely financial or opportunistic grounds. It is these floating residents that the operator has to be acutely aware of in any rent renegotiations.

 

 

 

Maybe we aren’t dealing with a simple demand curve...

 

Let’s get technical for a moment.  A normal demand curve would suggest that price changes would have a different impact on the number of lettings depending on the level of rents.  A small price change at the high end of the rent scale has a far more dramatic impact on occupancy levels than it would have at the low end.  However, we see there is a degree of price inelasticity in the BTR model. The residents are not just simple price takers. They will not automatically move to the next most appropriate scheme if it offers a slightly better price. They have to vote with their feet and there are sunken costs representing the expense and hassle of moving. In this case, a price change may have less impact at certain points and as it affects our different resident groups and so we may not have a smooth curve.

 

It may be that we have a graph with two distinct sectors with price changes impacting substantially differently at different rent levels.  The break-point could well be around the stabilised level.

 

 

 

 

Occupiers, in the States at least, seem generally comfortable accepting small rent rises on renewal

This operator's experience over time has shown him, anecdotally, that price changes of less than 8% do not tend to result in an exodus of many sitting residents. More limited increases of inflation plus a percent or two are usually quite acceptable to the majority.

Investors have criticised scheme promoters in the UK in the past for suggesting that there will be continual rental growth in the sector to support its otherwise low initial yield. This evidence from the States seems to suggest there may be some support for projections that anticipate a low level of sustained rental increase in the long term; with obvious cycles given market dynamics.

 

We would all benefit from shared information

 

As a young market, BTR information is very much in the hands of the operators and pretty jealously guarded.   It would be nice to think that drawing on experiences in the other sectors; we might see some pooling of non-sensitive information for the benefit and growth of the market generally.

 

  • What are the market void rates and how do they vary across schemes?
  • What percentage of BTR is reserved for ultra short-term lets?
  • How many operators are prepared to allow residents to short-let their units and how?
  • How do we assess the “stabilised” rent?
  • What is the lease length profile of the market and how is it changing?

 

All these features would add to our understanding and help with setting strategies for individual schemes.  Ultimately, the industry also needs information on the cost side as well to help answer the inevitable question of what is the gross to net leakage.

 

These last two papers have shown that BTR is far from a simple market with a standard product renting for a similar price.  There are complex ecosystems at the macro level across the market and also at the micro level within schemes themselves.  Better understanding of these systems will lead to happy customers, successful operators and a more effective market.

 

Geraghty Taylor.

 

Create differently

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

Last week, in Part 1 of this two-part series, we talked about the ecosystems within the overall Private Rented Sector market place.  This week we take a look at the business ecosystems that operate within a larger BTR scheme. Many operators now see the minimum size of a BTR scheme as well above 150 units. Moreover, they would prefer schemes of 500 units and above. In the States it is not uncommon to see buildings with in excess of 1,000 units. In the UK, complexes like East Village and Wembley Park now boast more than 3,000 residences.

 

The sheer number of occupiers, all on individual leases, inevitably means that there will be a spread of rents achieved, on similarly configured units, due to timing of letting and market conditions, even within the same building or complex. What kind of spread should an operator look for?

 

Voids are a necessary lubricant for growth

 

In any scheme or village, there will be a number of voids or vacant units. Conventional wisdom says that the manager should minimise these but more experienced operators appreciate that these represent the oil in the machine that gives the opportunity to continually refresh the units and set new rental highs, improving the general rental “tone” of the building. In addition, there are new businesses like Staykeepers and Lavanda who offer to actively manage very short term rentals at premium rents using accommodation platforms like Airbnb and Bookings.com. This can be on behalf of the operator or, indeed, on behalf of the resident with the operator's consent. This adds another dimension to a part of the BTR schemes rental offering. At the other end of the scale, there may also be longer leases which sit at lower rental levels for some time but which can have a positive impact on the overall risk profile.

 

So management becomes a balancing act and the profile of rents across the scheme or estate will resemble the spectrum of rents across the market that we saw last week. But there will be a normal or stabilised rent which will predominate and set the tone for the scheme. Around this there will be some who are benefiting from lower rents and some who are sitting at higher levels. 

 

How much of your scheme should sit at the normal or “stabilised” rent?

 

Multifamily operators in the States are quite willing to accept a void rate in a scheme in excess of 5% of total units in order to refresh, renew and set new rental levels. They are also comfortable to have only 60% to 70% of their occupiers paying the stabilised rental level. Much more than this and they start to feel that they are undervaluing their asset; much less than this and they worry that they are overvaluing the accommodation and that they risk losing occupiers if the market moves against them.

 

One multifamily operator in the States who achieves these thresholds gave us a very good insight to the profile of his occupiers. In his experience, he would normally expect to want to actively get rid of some 10% of his occupiers at any point in time because they were proving troublesome in one way or another. At the other end of the scale, he would describe 30% of his residence as “Happy as Larry” and likely to stay under most reasonable circumstances. Inevitably, another 30% would be looking to move but due to changes in their own life-circumstances like job changes, marriage or new or growing children. This leaves the remaining 30% being the floating occupiers who would consider moving on purely financial or opportunistic grounds. It is these floating residents that the operator has to be acutely aware of in any rent renegotiations.

 

 

 

Maybe we aren’t dealing with a simple demand curve...

 

Let’s get technical for a moment.  A normal demand curve would suggest that price changes would have a different impact on the number of lettings depending on the level of rents.  A small price change at the high end of the rent scale has a far more dramatic impact on occupancy levels than it would have at the low end.  However, we see there is a degree of price inelasticity in the BTR model. The residents are not just simple price takers. They will not automatically move to the next most appropriate scheme if it offers a slightly better price. They have to vote with their feet and there are sunken costs representing the expense and hassle of moving. In this case, a price change may have less impact at certain points and as it affects our different resident groups and so we may not have a smooth curve.

 

It may be that we have a graph with two distinct sectors with price changes impacting substantially differently at different rent levels.  The break-point could well be around the stabilised level.

 

 

 

 

Occupiers, in the States at least, seem generally comfortable accepting small rent rises on renewal

This operator's experience over time has shown him, anecdotally, that price changes of less than 8% do not tend to result in an exodus of many sitting residents. More limited increases of inflation plus a percent or two are usually quite acceptable to the majority.

Investors have criticised scheme promoters in the UK in the past for suggesting that there will be continual rental growth in the sector to support its otherwise low initial yield. This evidence from the States seems to suggest there may be some support for projections that anticipate a low level of sustained rental increase in the long term; with obvious cycles given market dynamics.

 

We would all benefit from shared information

 

As a young market, BTR information is very much in the hands of the operators and pretty jealously guarded.   It would be nice to think that drawing on experiences in the other sectors; we might see some pooling of non-sensitive information for the benefit and growth of the market generally.

 

  • What are the market void rates and how do they vary across schemes?
  • What percentage of BTR is reserved for ultra short-term lets?
  • How many operators are prepared to allow residents to short-let their units and how?
  • How do we assess the “stabilised” rent?
  • What is the lease length profile of the market and how is it changing?

 

All these features would add to our understanding and help with setting strategies for individual schemes.  Ultimately, the industry also needs information on the cost side as well to help answer the inevitable question of what is the gross to net leakage.

 

These last two papers have shown that BTR is far from a simple market with a standard product renting for a similar price.  There are complex ecosystems at the macro level across the market and also at the micro level within schemes themselves.  Better understanding of these systems will lead to happy customers, successful operators and a more effective market.

 

Geraghty Taylor.

 

Create differently

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

Will BTR modernise residential construction?

The customer-focused culture of BTR is challenging us to rethink the rental market; now it looks set to disrupt residential construction and modernise its delivery. Offsite assembly suits the high quality and rapid deployment requirements of Build to Rent. An increasing number of new BTR developers are exploring the offsite route and some are lucky enough to secure supply in a somewhat low capacity market.

 

Major players like Greystar are bringing forward schemes in Croydon and Greenford which involve the delivery and assembly of thousands of modular units.  So is this the way forward? The approach suggests a shift towards vertical integration with greater control of the design and delivery of the product being sought by experienced BTR players. The benefits are better product quality, predictability and supply chain control, which together can help to reduce cost and risk. BUT it is not always as easy as aligning design and procurement. When developers approach their investor’s investment committee or their bank for construction funding, they are met with questions about:

  • the procurement risk of tying their product delivery to the output of a single supplier
  • the risk, in a restricted market, that the product supply might not be picked up by a new supplier in the event of the corporate failure of the original off-site manufacturer....and that the scheme has to start again from scratch
  • the problem that these considerations pose to obtaining contract  insurance for the build contract at all; and
  • the fact that the industry's own efforts with BOPAS accreditation has only resulted in some 70 accredited businesses so far.

 

And so, all too often, the developer opts for a traditional build... and the off-site industry misses out on revenue that could help it expand to meet the growing demand. However this is not always the case, and despite some of the risks, progressive BTR companies recognise that in building a BTR portfolio, it needs to adopt different approaches to design and procurement.

 

Just this month, legal experts, Trowers Hamlin released a collaborative report entitled “Funding Barriers to offsite housing – Separating fact from fiction”.  They conclude that there is no reason why appropriately delivered offsite should be treated any less favorably than traditionally built homes for the purpose of charging.  They should not be viewed as depreciating assets. Indeed, there is evidence that manufactured homes represent an opportunity to achieve a design life that exceeds that of traditionally built homes. But traditional approaches to performance security must adapt to allow for the specific features of offsiting to deliver confidence.

 

Shaun Grainger of PIB Insurance Brokers has some very interesting comments about his company’s proactive approach to underwriting offsite construction. Ultimately, this is the key to securing the necessary construction and investment funding.

 

Our take on his view can foresee a world where insurance premiums are actually lower for offsite construction because the insurer is underwriting a “product” that is itself already BOPAS accredited, reducing costly on-site inspecting.  Greater control and clarity should reduce claims but to get there the industry must tackle specific concerns of safety and durability in use and added risks like those in transportation. 

 

Let’s set the scene by looking at the recent development of the off-site industry.

 

Like every market innovation new names and definitions abound; so you will hear Offsite Construction, Design for Manufacture and Assembly (DfMA) and Modern Methods of Construction (MMC) used pretty interchangeably.  The whole industry is not as recent as you may think.  In reality, it has had a long and laboured development. Early work was done in the late 1990’s which led to the “Rethinking Construction report” - often referred to as the Egan report.  Interest, most recently, has been crystallised by Mark Farmer’s review of the construction labour market in the UK for the Ministry of Housing, Communities & Local Government (MHCLG), known as, “Modernise or Die”.  This has found widespread resonance in an industry struggling with mistrust, poor value, poor delivery and poor quality, along with a legendary inability to meet program or budget.  The house building industry today, for instance, is required to increase output by 50% just to meet Government targets, but set this against a backdrop of a workforce forecast to decrease by 25% to 2026.  We currently aren’t growing new builders!

 

Offsite finds a new champion

 

Offsite at its simplest, is a system which is based on a kit of parts, produced in a factory environment, with the aim to assemble this high quality product quickly and efficiently on site.  The process has found favour already with sectors that have a very repeatable product like the hotel and student accommodation industries.  There are many solutions ranging from full volumetric modular which literally allows you to crane in a room to more componentised solutions.  The MHCLG released its “MMC definition framework” in March which gives a very helpful introduction to the entire spectrum. See below:

 

 

BTR schemes aspire to high quality and robustness in the longer term and they have significant levels of repetition with relatively small variations between unit types on offer. This aligns with brand placement, volume production, predictably and the capacity to quickly turn capital into revenue.  To do this, systems must be standardised across schemes to maximise buying power and minimise maintenance costs, delivering Facilities Management efficiency.  Offsite seems to have found its new champion; look at these key matches:

 

 

Production: as with any mass produced items, once you have set your production line up, you want it running with minimum disruption at ‘full tilt’; you want your systems, assemblies and finishes to be standardised and efficient - just as you would with BTR - and you want that speed of output-to-site to allow the capital investment to generate income quickly.

 

Risk management: Once the system is created and tested, the risk so prevalent with traditional construction - where every scheme is a prototype - is virtually eliminated. If it worked under test on one scheme, with equivalent parameters there is no reason for it not to work on the next, or the one after that...

 

Longevity: The use of repetitive, tested detailing and predictable servicing means that you know exactly how and where to maintain the building; you can be assured that the traditional construction industry’s penchant for making it up as you go has been avoided... in effect you have taken your building away from a poorly supervised site environment into a managed, safe, supervised environment in a factory where Quality Assurance can be rigorous and continuous. Further supporting this is the BOPAS scheme, led by major insurers, the OffSite industry and other key stakeholders which provides surety of quality, longevity and production quality.

 

Design quality: No one wants boring buildings, or repetitious “prefabs” so most schemes are hybridised to a greater or lesser extent, allowing different systems to exploit their key benefits, delivering exciting, good looking buildings which reflect the brand and quality of their owners. 

 

Once the strategic decision to use off-siting has been made, we at Geraghty Taylor focus on product definition, appropriate standardisation and supply chain management.  We look to design the Mods, Pods and Cogs  (room modules, pod components like kitchens and bathrooms and micro components like utility cupboards) that will fit together to create the building.

 

Leading to a new generation of construction employment

 

The move to factory based production brings with it some key advantages for growth.  The appeal of this environment over the cold, wet, site-based employment of traditional build is clear.  It can appeal to a wider cross section of employees, both by age and gender.  It is also digitally empowered so can literally “key” into the career aspirations of the young.  You might be interested to know that both Lego and IKEA are looking to “disrupt” in this space.

 

BUT managing a growth path is not without its difficulties.  The UK market is dominated by a handful of systems and capacity to deliver at peak has been questioned.  Securing your supply can very quickly be difficult in strong markets where there are insufficient “fall-back” suppliers of sufficient quality.

 

The quality point is important, as the “prefab” of old carried with it concerns about robustness and finance, which, in the form of mortgages, was often limited.  Insurers are asking ‘Will these buildings last’?  The industry is convinced they will and has created its own accreditation system; BOPAS.  This is a risk-based evaluation which demonstrates that homes built from non-traditional methods & materials will stand the test of time for at least 60 years.  But there are currently fewer than 70 BOPAS accredited operations and when you see the reduced options available for building at height, you can appreciate why insurers worry that the developers are placing a lot of risk with one supplier.  But isn’t this just the same as a contract with a traditional main contractor over whom you have little real control.

To address this, volume consumers are developing their own systems like L&G’s  and large international developers are simply extending their supply routes from their existing domestic or international procurement centres into the UK.  Geraghty Taylor has just completed a full modular design plan for a major client wanting to adapt their own domestic model to the UK, or you could say design “British multifamily”.  They will look to deploy 10,000 units over the next 5 years or so and achieve substantial cost savings due to the volume.

 

It is clear that the Government have identified the need to support and encourage the sector.  There are grants and funding available and the initiatives of the MHCLG through the Construction Leadership Council are invaluable.

 

 Buildoffsite is an organisation set up to promote the adoption of offsite solutions. It’s membership include Developers, Contractors, Consultants and Suppliers and it is an excellent source of information for all aspects of offsite strategies and technical solutions.  Their recently created BTR group aims to promote offsite solutions specifically to the BTR industry. 

 

It is generally accepted that Construction needs to be modernised and this process is already underway. There are going to be challenges along the way, but  BTR presents a significant opportunity for our new sector to drive meaningful, technology-rich change into the construction industry through offsite solutions. To be successful all parties will need to co-operate to ensure delivery of the bright ambitions of BTR.

 

Offsite thinking is in Geraghty Taylor’s DNA and we always design with offsite in mind.

 

Geraghty Taylor. Create differently

 

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

The customer-focused culture of BTR is challenging us to rethink the rental market; now it looks set to disrupt residential construction and modernise its delivery. Offsite assembly suits the high quality and rapid deployment requirements of Build to Rent. An increasing number of new BTR developers are exploring the offsite route and some are lucky enough to secure supply in a somewhat low capacity market.

 

Major players like Greystar are bringing forward schemes in Croydon and Greenford which involve the delivery and assembly of thousands of modular units.  So is this the way forward? The approach suggests a shift towards vertical integration with greater control of the design and delivery of the product being sought by experienced BTR players. The benefits are better product quality, predictability and supply chain control, which together can help to reduce cost and risk. BUT it is not always as easy as aligning design and procurement. When developers approach their investor’s investment committee or their bank for construction funding, they are met with questions about:

  • the procurement risk of tying their product delivery to the output of a single supplier
  • the risk, in a restricted market, that the product supply might not be picked up by a new supplier in the event of the corporate failure of the original off-site manufacturer....and that the scheme has to start again from scratch
  • the problem that these considerations pose to obtaining contract  insurance for the build contract at all; and
  • the fact that the industry's own efforts with BOPAS accreditation has only resulted in some 70 accredited businesses so far.

 

And so, all too often, the developer opts for a traditional build... and the off-site industry misses out on revenue that could help it expand to meet the growing demand. However this is not always the case, and despite some of the risks, progressive BTR companies recognise that in building a BTR portfolio, it needs to adopt different approaches to design and procurement.

 

Just this month, legal experts, Trowers Hamlin released a collaborative report entitled “Funding Barriers to offsite housing – Separating fact from fiction”.  They conclude that there is no reason why appropriately delivered offsite should be treated any less favorably than traditionally built homes for the purpose of charging.  They should not be viewed as depreciating assets. Indeed, there is evidence that manufactured homes represent an opportunity to achieve a design life that exceeds that of traditionally built homes. But traditional approaches to performance security must adapt to allow for the specific features of offsiting to deliver confidence.

 

Shaun Grainger of PIB Insurance Brokers has some very interesting comments about his company’s proactive approach to underwriting offsite construction. Ultimately, this is the key to securing the necessary construction and investment funding.

 

Our take on his view can foresee a world where insurance premiums are actually lower for offsite construction because the insurer is underwriting a “product” that is itself already BOPAS accredited, reducing costly on-site inspecting.  Greater control and clarity should reduce claims but to get there the industry must tackle specific concerns of safety and durability in use and added risks like those in transportation. 

 

Let’s set the scene by looking at the recent development of the off-site industry.

 

Like every market innovation new names and definitions abound; so you will hear Offsite Construction, Design for Manufacture and Assembly (DfMA) and Modern Methods of Construction (MMC) used pretty interchangeably.  The whole industry is not as recent as you may think.  In reality, it has had a long and laboured development. Early work was done in the late 1990’s which led to the “Rethinking Construction report” - often referred to as the Egan report.  Interest, most recently, has been crystallised by Mark Farmer’s review of the construction labour market in the UK for the Ministry of Housing, Communities & Local Government (MHCLG), known as, “Modernise or Die”.  This has found widespread resonance in an industry struggling with mistrust, poor value, poor delivery and poor quality, along with a legendary inability to meet program or budget.  The house building industry today, for instance, is required to increase output by 50% just to meet Government targets, but set this against a backdrop of a workforce forecast to decrease by 25% to 2026.  We currently aren’t growing new builders!

 

Offsite finds a new champion

 

Offsite at its simplest, is a system which is based on a kit of parts, produced in a factory environment, with the aim to assemble this high quality product quickly and efficiently on site.  The process has found favour already with sectors that have a very repeatable product like the hotel and student accommodation industries.  There are many solutions ranging from full volumetric modular which literally allows you to crane in a room to more componentised solutions.  The MHCLG released its “MMC definition framework” in March which gives a very helpful introduction to the entire spectrum. See below:

 

 

BTR schemes aspire to high quality and robustness in the longer term and they have significant levels of repetition with relatively small variations between unit types on offer. This aligns with brand placement, volume production, predictably and the capacity to quickly turn capital into revenue.  To do this, systems must be standardised across schemes to maximise buying power and minimise maintenance costs, delivering Facilities Management efficiency.  Offsite seems to have found its new champion; look at these key matches:

 

 

Production: as with any mass produced items, once you have set your production line up, you want it running with minimum disruption at ‘full tilt’; you want your systems, assemblies and finishes to be standardised and efficient - just as you would with BTR - and you want that speed of output-to-site to allow the capital investment to generate income quickly.

 

Risk management: Once the system is created and tested, the risk so prevalent with traditional construction - where every scheme is a prototype - is virtually eliminated. If it worked under test on one scheme, with equivalent parameters there is no reason for it not to work on the next, or the one after that...

 

Longevity: The use of repetitive, tested detailing and predictable servicing means that you know exactly how and where to maintain the building; you can be assured that the traditional construction industry’s penchant for making it up as you go has been avoided... in effect you have taken your building away from a poorly supervised site environment into a managed, safe, supervised environment in a factory where Quality Assurance can be rigorous and continuous. Further supporting this is the BOPAS scheme, led by major insurers, the OffSite industry and other key stakeholders which provides surety of quality, longevity and production quality.

 

Design quality: No one wants boring buildings, or repetitious “prefabs” so most schemes are hybridised to a greater or lesser extent, allowing different systems to exploit their key benefits, delivering exciting, good looking buildings which reflect the brand and quality of their owners. 

 

Once the strategic decision to use off-siting has been made, we at Geraghty Taylor focus on product definition, appropriate standardisation and supply chain management.  We look to design the Mods, Pods and Cogs  (room modules, pod components like kitchens and bathrooms and micro components like utility cupboards) that will fit together to create the building.

 

Leading to a new generation of construction employment

 

The move to factory based production brings with it some key advantages for growth.  The appeal of this environment over the cold, wet, site-based employment of traditional build is clear.  It can appeal to a wider cross section of employees, both by age and gender.  It is also digitally empowered so can literally “key” into the career aspirations of the young.  You might be interested to know that both Lego and IKEA are looking to “disrupt” in this space.

 

BUT managing a growth path is not without its difficulties.  The UK market is dominated by a handful of systems and capacity to deliver at peak has been questioned.  Securing your supply can very quickly be difficult in strong markets where there are insufficient “fall-back” suppliers of sufficient quality.

 

The quality point is important, as the “prefab” of old carried with it concerns about robustness and finance, which, in the form of mortgages, was often limited.  Insurers are asking ‘Will these buildings last’?  The industry is convinced they will and has created its own accreditation system; BOPAS.  This is a risk-based evaluation which demonstrates that homes built from non-traditional methods & materials will stand the test of time for at least 60 years.  But there are currently fewer than 70 BOPAS accredited operations and when you see the reduced options available for building at height, you can appreciate why insurers worry that the developers are placing a lot of risk with one supplier.  But isn’t this just the same as a contract with a traditional main contractor over whom you have little real control.

To address this, volume consumers are developing their own systems like L&G’s  and large international developers are simply extending their supply routes from their existing domestic or international procurement centres into the UK.  Geraghty Taylor has just completed a full modular design plan for a major client wanting to adapt their own domestic model to the UK, or you could say design “British multifamily”.  They will look to deploy 10,000 units over the next 5 years or so and achieve substantial cost savings due to the volume.

 

It is clear that the Government have identified the need to support and encourage the sector.  There are grants and funding available and the initiatives of the MHCLG through the Construction Leadership Council are invaluable.

 

 Buildoffsite is an organisation set up to promote the adoption of offsite solutions. It’s membership include Developers, Contractors, Consultants and Suppliers and it is an excellent source of information for all aspects of offsite strategies and technical solutions.  Their recently created BTR group aims to promote offsite solutions specifically to the BTR industry. 

 

It is generally accepted that Construction needs to be modernised and this process is already underway. There are going to be challenges along the way, but  BTR presents a significant opportunity for our new sector to drive meaningful, technology-rich change into the construction industry through offsite solutions. To be successful all parties will need to co-operate to ensure delivery of the bright ambitions of BTR.

 

Offsite thinking is in Geraghty Taylor’s DNA and we always design with offsite in mind.

 

Geraghty Taylor. Create differently

 

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

Rented residential appealing to investors across the globe

Well over a third of all the cash raised globally last year, for sector-specific private equity real estate funds, targeted funds aiming to invest in multifamily rented residential. This latest survey by PERE shows the funds amassing a war chest of over $10 Billion. With typical debt leveraging, this would give those funds buying-power in the order of $20billion.

 

Pension funds and insurance company investors across the globe are appreciating the favourable investment characteristics of rented residential. Their quest is to find investment assets that match their liabilities. Typically, these liabilities are linked to inflation in the long term and often to wage inflation. Our home is such an important part of our well-being that most of us spend more than a third of our income on it. The rent we pay or the purchase price we are willing to accept reflects the current state of the economy and has traditionally grown in line with that economy.

 

With this positive macroeconomic background, get the investment characteristics right and you are onto a winner. Flexible shorthold tenancy contracts work for both parties. A broad income base from multiple occupiers reduces void risk and, if operated as a business and managed like hospitality, we can achieve rapid re-letting and maintain high occupancy rates. Working hard to establish a community within each scheme will increase the length of stay of your residents. And ultimately, remember one of our catchphrases at Geraghty Taylor, “Happy customers pay you money!”

 

So now you can see what these global investors are thinking. This is an asset that delivers a solid long-term income from a wide potential customer base. But be sure this requirement was built into the scheme from the start. Be mindful of the play-off between upfront cap-ex and ongoing ops-costs. Appreciate the cost of management and future cap-ex and understand the life cycle of the building. Take a look at our BTR Timeline.

All the funds raising money will hope to benefit from rental growth in the long-run. The brave ones will take on development risk to enhance their returns to investors by making a development profit. In the UK it is interesting that we are at the very beginning of our journey into multifamily investment, but despite this being an “emerging” market, we already have pricing which is very reflective of a mature institutional market. There seems to be little if any, obvious first-mover premium for the early adopters. We seem to have imported the idea but also the pricing.

 

The old-world order of cash raising has continued with North America taking 42% of all cash raised and Europe just over 20%. In the UK, Hearthstone Investment Management announced at the end of February that it had closed Hearthstone Residential Fund 1 with just over £200 million raised. The Fund has seven local authority pension fund investors and welcomed The Merseyside Pension Fund and The Tyne and Wear Pension Fund in this latest round. They clearly see the investment case, but just as important, the social significance of funding housebuilding in the UK.

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

Birth of a new market – 5 years in the life of BTR

It's November 2013 and Get Living London welcome their first resident into the new scheme at East Village in Stratford. Arguably this marks the birth of the new Build to Rent market. 

 

It's just over 5 years on and we can list over 150,000 units in 650+ schemes being delivered by more than 250 different owners. We identify more than 900 businesses employing thousands of active participants in BTR.

 

“What a ride!” says Colin Barber, Research at Geraghty Taylor. “I reckon the growth in this market has been as fast as anything we have seen in the last 40 years; its growth has already been equally as impressive as the private student market in the “noughties” and out-of-town retailing in the 1990s.  But interestingly this is an “emerging market” that has already priced like an established, mature institutional market.”

 

In 2012 we typically had "tenants" renting from a plethora of small private landlords often enduring poor servicing, punitive agency charges and hefty deposits.  But now we are seeing the arrival of professional managed, institutionally backed, landlords serving "customers" and drawing on skills learnt in hospitality markets.

 

BTR is now at the top of the pick list for many investors, alongside other “alternative” real estate classes.  Turnover in these sectors is starting to eclipse the mainstream sectors like offices and retail and a whole industry is having to get to grips with a new sector and a general move towards real estate as an operating asset, delivering a “net income”.

 

But how times have changed! We have taken a brief and exciting run back over those last 5 years:

 

2013 – “It’ll never work” – East Village is surely a one-off opportunity?

 

  • Qatari Diar and Delancey buy 1,439 homes in the London 2012 Athletes’ Village and start to Get Living London. Their first residents move in during November 2013.
  • Others look on and wonder where else you can find sites that have such quality infrastructure from the outset. As CEO, Neil Young says, “we were probably the first half billion-pound start-up!”

 

2014 - It might work BUT only if you get gifted the site or get some huge incentives 

 

  • Brendan Geraghty wants to know “why don’t institutions invest in residential?” And conversations follow about rent controls, reputational risk and fractional incomes. This is just not very institutional!
  • But they do it in lots of other countries, like multifamily in the US and in Germany and Holland!? 
  • The dramatic housing shortages in London and across the country continue and it is almost impossible to ignore the compelling macro-economic argument for investment
  • The ULI produces,  “Build To Rent - a Best Practice Guide” in April 2014, sponsored by the British Government’s Private Rented Sector (PRS) Taskforce.
  • We now have a name for the sector: Build to Rent - BTR

 

2015 - It might just work you know!

 

  • Shorthold tenancies avoid rent control issues, a broad income base from multiple tenants reduces void risk and, if operated like a business and managed like hospitality, we can achieve rapid re-letting and maintain high occupancy rates.
  • But with RICS valuation guidance that says rented residential apartments should be valued by applying a discount to the sale price, “For Sale” housebuilders will always outbid rental. We aren’t going to see any stock!  Viability remains a real problem and often still needs discounts or concessions.
  • Let’s think as an industry about this - ULI UK Residential Council holds workshops in March
  • Only some 5,000 units now complete and most of this is in Permitted Development conversions of tired office blocks.
  • 15 companies own 70% of the pipeline of 20,000 units in 155 schemes
  • Annual turnover (all purchases) reaches £1.8bn
  • East Village welcomes its 1,000th resident in September 2015

 

2016 – It’s time to take this seriously – it’s not just PD conversions and one-off LA deals

 

  • The ULI produces a second edition,  “Build To Rent - ULI Best Practice Guide” in May 2016 widely viewed as the textbook on the sector
  • But is it the same as PRS, a subset or different? Geraghty Taylor produce, “The Private Rented Sector Explained"
  • In October 2016, a new industry report concluded that the construction sector must 'Modernise or Die' – the Farmer Report. Off-siting comes into focus.
  • Interest focusing on management platforms and the realisation that the tenant is becoming the customer. 
  • Review of scheme lettings show that it’s not just the millennials moving in but millennial -minded occupiers of whatever age
  • What is the gross to net factor for revenue? Is 25% achievable?
  • Valuations still on discounted sale price
  • Another £1.8bn of transactions
  • Oh, and better not forget Brexit and Trump!

 

2017 – Wow! - This is the best thing since sliced bread, I want some!! 

 

  • Sea change in attitude towards the new sector
  • Savills “Drop a Gear on House price Growth”  maybe the housebuilders won’t always outbid and what about those unlet “for sale” schemes? Will they convert to BTR?
  • What is the killer amenity play – is this how we differentiate? Geraghty Taylor issues “Build To Rent – A How To Guide” – including our 5 Golden Rules
  • RICS issue new guidance notes embracing the concept of NOI (net operating income) and yield valuation methodology in February….hurray!
  • L&G announce they have launched their own modular construction factory outside Leeds
  • Turnover reaches £3.0bn – JLL identify £50bn investment waiting to enter – that’s 20 years plus dry powder  at current build-out rates
  • 80% of investors surveyed by the IPF intend to increase their weighting to residential – earmarking £8bn for the sector; nearly double the previous year!
  • The tragic fire at Grenfell Point tower focuses minds on high-rise safety

 

2018 – It’s a long income thing...and needs a brand

 

  • The investment market is realising the long term income profile of BTR. It is a completely different model from the housebuilders' development profit model.
  • Geraghty Taylor issue, The BTR Timeline” recognising that the creation of the building is a bump in the road on the way to creating a successful BTR business
  • East Village reaches 3,000 residents and is working on an additional 1,500 units in new developments on site…take a look at “What you get for £650 a week” at East Village.
  • Tall buildings (of 20+storeys) start to dominate new permissions.  Over 500 in London in 2018 could deliver 100,000 homes by 2030.  The UK's urban skyline is changing at the fastest pace in a generation.
  • The importance of brand in developing a successful BTR business is being recognised.  Geraghty Taylor issue, “Why is brand so important to BTR”
  • Completed units rise from 5,000 to 30,000 a growth of 600% in 3 years
  • Colliers identify rent premiums of 10% in BTR schemes over comparable apartments
  • Turnover reaches £4.2bn according to Property Data.

 

2019 – Has only just begun...

 

  • But we’ve already seen major REITs like Landsec and British Land among the big developers and investors targeting the maturing BTR market this year

 

…and a few thoughts looking forward…

 

    • A few brave commentators like Nick Whitten at JLL have shown that it if the UK market follows the trends seen in US multifamily, we could see institutional investment in the BTR market on par with the cash invested into the office market. 
    • This would mean a huge expansion in stock but where will the sites come from?
    • The next few years will see BTR delivered to an increasing number of customers who will start to appreciate it for its specific rental experience.   “Elective renting” will become a tenure choice for many and building typologies will develop to allow these guys to go from student to family in suitable rented accommodation. 
    • The industry will mature and new specialists appear.
    • Interest in offsite solutions will continue to increase as more vertically integrated companies see it as part of their business strategy and not just a design and procurement option.
    • Control over product and supply chain is being demanded by savvy investors to reduce operating costs and NOI.   
    • Wellbeing and social impact will increasingly be measures of success of a scheme breaking the stranglehold of pure financial return

 

Here’s to the next 5 years!

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

Saxon house
48 Southwark Street
London
SE1 1UN

+44 20 3696 5530

design@geraghtytaylor.com