BTR Ecosystems Part II

August 2019

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