Category Archives: Newsletter

Insurance Implications of Modern Construction

Geraghty Taylor is pleased to present our first guest article by Shaun Grainger of PIB Insurance Brokers, picking up on the vital insurance issue covered in our earlier MMC article.

 

The UK national housing crisis and ongoing pressure to provide new housing is showing no sign of abating. More housing is required to ease the strain on the housing market and hit the proposed government targets. The natural solution is to build cost-effective new homes, rather than conversion or alternative housing arrangements. Furthermore, the demand in rental sectors such as student accommodation, build to rent and retirement living, is also seeing an increase in building activity for developments with purpose-built solutions. Modern Methods of Construction (MMC) and modular construction are being utilised throughout the industry as efficient and quicker ways of building to meet the ongoing demand, with its predominant use in the development of high-rise apartment blocks.

 

While modular and other forms of MMCs for residential and commercial property are nothing new, having been part of the industry in various forms for many decades, they do present some important insurance considerations for those insuring their pre-build and construction.

 

Insuring the ‘product’ – Warranties and Indemnities

As technology, and the building methods that follow, improve then naturally so should the quality in design and manufacture of modular units. This leads to a primary focus of inspecting the build off-site and reducing the time spent on-site reducing defects, which have been known to delay completion on a large-scale project and use the time and resources of multiple contractors.

 

For the insurance sector, the units finished offsite are now being viewed as ‘products’ in themselves, from a design, build and installation perspective. Therefore, placing increasing importance on having the correct insurance warranties and contractual obligations. Current insurance warranties would provide protection for up to 12 years from practical completion, notwithstanding the usual contractual requirements. Within the residential market, these warranties are a requisite particularly by funders, especially if the properties are being sold/financed. However, the same benefits can also apply to commercial units.

 

Does using modular construction mean higher claims?

As a ‘product’, there is greater clarity of control and therefore better control of the delivery, which may, in turn, reduce the number of claims brought about in construction. However, due to the type of construction, these claims would likely be greater than in traditional construction as the whole unit may need to be replaced in a problem occurs.

 

Other insurance considerations and risks to be considered which may lead to increased claims costs include:

  • Buildings using MMCs will often only be designed to satisfy local Buildings Regulations which typically only cover life safety issues, not fire resistance. Using lightweight and combustible materials also mean there will be less resistance to fire spread.
  • Timber framed buildings are of concern to insurers and will require fire suppression measures.
  • External cladding panels with foam fillings have excellent insulation properties but are highly combustible.
  • Fire/smoke and water can get into the voids between modular units leading to much larger claims than would otherwise be the case.
  • Connection of services to pod units may be made by non-specialist tradesmen which can lead to problems over time.
  • Accessibility for repairs and maintenance may be difficult, repairs are potentially less straightforward if a whole pod has to be removed, especially if at the bottom of a high-rise building.
  • The fire break integrity of the building is easily compromised by drilling into panels to install new services.
  • Many MMCs are new and innovative, their resistance to damage and performance over time is unknown.
  • There may be problems in obtaining replacement parts in future, particularly if the manufacturer has gone out of business.

 

Insuring the modular developer

The advantage for developers lies in the fact the modular companies have improved supply access and stock capacity than those with specific onsite construction. Modular companies can plan the build more efficiently without reliance on multiple parties or contractors. Further benefits include faster construction times, less people on site and less wastage. Quality control is improved as works are carried out in a controlled environment and less prone to human error and services (plumbing & electrics) can be pre-installed so that the only connections are required are to the external supplies once in situ. The modular constructions are also are highly energy efficient.

 

Modular buildings can be cheaper to insure as the industry is still in its infancy for the insurance market. In future, this could lead to less complicated placement, which in turn could also result in lower premiums although there is little evidence for this in the current market.

 

Modular construction – what are the pitfalls?

Although MMCs do have many benefits, the risk of the completed modules themselves can be damaged or destroyed in transit is possible, which results in longer delays to the programme. These may not be covered under a Delay in Start up (DSU) section of a Developers Project insurance programme, especially if responsibilities for storage or delivery have not been clearly defined.

 

Also, if a contractor or supplier becomes insolvent in a traditional build contract, the developer can obtain alternatives. If a modular producer goes insolvent or the units are damaged beyond repair before reaching the site, it would prove more difficult to obtain replacements in a suitable timescale.

 

The insurance broker and BOPAS

Working with your insurance broker and MMC insurers can address the concern of using modular construction during the design phase. It is also worth considering the Buildoffsite Property Assurance Scheme (BOPAS) Scheme, which provides an assurance of the integrity of offsite construction systems delivered in a consistent and competent manner conforming to contract specifications.

 

The BOPAS assessment involves all aspects of the business operation including systems, processes and procedures, together with handover interfaces from design through offsite manufacture and construction/assembly to client handover. These are all being tested against the arrangements for sustaining quality delivery, dealing with environmental and project changes and the control measures that are applied to mitigate delivery risks.

 

Set up by BLP insurance, the BOPAS scheme provides industry wide accreditation for the modular products used in construction. Using BOPAS approved contractors gives your insurer confidence in the quality of the product and relinquishing the need for additional surveys and inspections by the insurer. In time, this may also result in lower premiums and the market confidence increases, however this has not yet been evident.

 

The importance of disclosure

The use of MMCs is an important feature which should be disclosed to insurers who may require additional precautions to be undertaken. If you are buying a property, the use of MMCs may not be immediately obvious.

 

The Insurance Act of 2015 introduced a duty of fair presentation, meaning that the insured must make the insurer aware of all the risks of insuring the building or home. Therefore, if you have any doubts as to the construction of a property it is important that you investigate and establish if this is the case. If an MMC has not been disclosed to the insurer, they are within their rights to impose a rateable settlement in the event of a claim or, even worse, avoid the policy which could potentially leave Property Owners or Developers many £1000s out of pocket.

 

Geraghty Taylor. Create differently

 

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

 

 

 

To discuss with a property specialist about insuring your property, where built with MMC or traditional methods, please contact – Shaun Grainger, PIB Insurance Brokers – Sales Manager, Property and Construction on 07496980612 or shaun.grainger@pib-insurance.com.

Why is brand so important to Build to Rent

....or put another way...why are designers embracing brand when what they do is design buildings?

 

Ultimately, we can't design the building without a thorough understanding of the business strategy that the building is supporting. This is best defined by its Brand.

 

Brand in most peoples’ minds means a fancy logo. But if you consider it for a moment, you realise that logo conjures up a mental picture of what the product is, who it is created for, its quality, the service behind it and, ultimately, the price you will have to pay for it; all gleaned from that fancy logo. So clearly, from the business operator’s perspective, the brand associated with the logo embraces the entire business philosophy and strategy of the company.

 

Put this into the Build to Rent context and you can quickly see how the brand defines the target audience, the style of the building, the level of services, the provision of amenity and even the price point; all crucial factors in good design. We call this #BrandBeforeBuilding

 

Many of the businesses that we are working with do not come from a consumer product background. They are typically from a real estate development, property investment or housebuilding background. Brand, in so far as it applies to their product, has not previously been a mainstay of their businesses.

 

You might think this only has relevance to the long-term operator/investor.  Surely a developer looking to exit on completion or even at planning doesn't need to be bothered by brand. Well, they do if they want to reach the widest buyer market and get the best price.

 

We are working now on schemes where the developer will exit on planning, but we are integrating what you might call a white-labelled, loose brand into the scheme to allow the future operator to shoe-horn in their own brand.

 

Brand in BTR is very new with only a few operators having a completed model.  Even those internationals with long-established brands need to put it into a UK context. When we work for an established US multifamily operator, for instance, we must first get a thorough understanding of their existing brand values. We then need to discuss how these might be adapted for the UK marketplace and then the specific building in question.

 

A true brand integrates all parts of the provider’s business plan and BTR offer. It acts as a differentiator between providers and helps the consumer navigate and select between them. A good customer experience builds trust and loyalty and gives more brand buy-in. As a brand develops, it generates engagement with its customers, making them feel comfortable with its specific lifestyle offering.

 

In BTR, this will deliver lower voids by increasing renewals, extending the length of leases and increasing the number of customer referrals to like-minded buddies. Done well, it will maximise net operating income and deliver business success. This builds a reputation and enhances the customer experience.  We have explained this BTR Brand Value Loop in a recent infographic. Take a look.

 

 

Geraghty Taylor. Create differently

 

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

BTR: a Catalyst for Successful Mixed-Use Development

It is quite clear to us at Geraghty Taylor that Build to Rent has an incredibly valuable part to play in pump-priming successful mixed-use and tenure developments and de-risking a part of the disposal phase.

 

Alongside other rented residential solutions like student living, co-living and even retirement living, it has the power to deliver the activity, atmosphere and sense of community from the earliest phases of development, creating the vibrancy necessary to attract home buyers to the "for sale" elements of the scheme. Importantly, it can prove to be a very useful way to reduce development spending and recoup some cost at the earliest opportunity.  The English Cities Fund have used the approach at Salford Central where the 225 unit Slate Yard BTR scheme sits alongside the wider £650mn mixed-use development.

 

Placemaking is so important in large-scale development. It is clearly about quality master-planning and sensitive design, but to truly create a sense of community it is so important to remember it is all about people; people who want to be there because of the quality of the environment and vibrancy of the atmosphere.

 

BTR brings activity. Using modern methods of construction, buildings can be delivered quickly. The let-up process is dramatically faster than traditional sales, so residents start using the site much earlier and high occupancy levels are achieved quickly. This is in marked contrast to the situation in some of London's notorious see-through towers where buyers are non-resident investors who frequently leave their investments vacant and often don't let them on as BTLs.

 

BTR schemes are typically close to transport hubs and so espouse reduced car ownership, preferring instead car-pooling and sharing. Bike usage is also high and this all leads to increased journeys on foot or bicycle creating a more human presence in the scheme.

 

Suitable amenity provision is standard in BTR buildings. This amenity can often be shared with residents of other buildings in the complex or even opened to a wider local membership. 

 

The UK now enjoys two hugely successful schemes which have fully embraced BTR. Get Living's scheme at East Village was the pioneer, quickly followed by Tipi's Wembley Park scheme which was initially conceived as "for sale" residential. We can learn a lot by looking at the experience of these developments over the last 10 years or so.

 

East Village's origins as the Olympic village meant that it had no specific amenity provided. The new phases of development will incorporate shared facilities to be used across the village. Importantly, the development has supported the creation of a new school and interestingly helps fund a system of security cameras and additional policing.

 

With the arrival of the Brent Civic Centre, Wembley Park has integrated civic functions offering a library and hireable function rooms. They have developed an environment to encourage successful food and beverage provision with the creation of the designer outlet centre and Boxpark which nicely dovetails in with the extensive student living on site. All of this is supported by local convenience retailing.

 

These pioneers have discovered that their product appeals to a much wider base than purely millennials. "Millennial-minded" people come in all ages and from all backgrounds. 

 

Just this week, L&G has announced their proposals for 1,000 new homes in Wandsworth catering for "all ages and social groups" including 35% affordable housing. At the start of May, they also announced plans to launch Guild Living; a £2 billion business combining retirement living with children's nurseries in city centres.

 

So if our decision to include BTR has created the vibrancy we desired, what has it done for our financial position? Well, we are receiving income faster and this income producing asset delivers opportunity.  A management contract may have already been agreed with an appropriate operator and the asset is highly saleable. Indeed, institutional investors are hungry for this type of product and will commit at the outset. 

 

This provides a rare opportunity to reduce total development expenditure at an early stage in the overall project plan, recycling capital and helping with cash flow and profitability. Given our deep involvement in the BTR space, Geraghty Taylor has developed an audit capacity which lets us review existing buildings and advise on their suitability for letting and give guidance on any potential interventions required to make them suitable for the purpose.

 

BTR is fast establishing itself as an important use-class in its own right, earning itself an undeniable place in mixed-use developments.

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

 

The Virtuous Triangle

All development vehicles are geared towards generating a financial return for their investors. However, it is the long-term, income-generating characteristics of the BTR model that sets the sector apart from its counterparts. The long-term nature of the business results in healthier and more equitable relationships between investors and their customers.  What’s more, these benefits reach far beyond the intimate supplier/consumer relationship by enhancing the collective built environment through to the very nature in which buildings are produced.

 

At Geraghty Taylor we refer to this as the ‘BTR virtuous triangle’.

 

 

 

 

Customer Focus starts the process and quality sits at its heart

 

First, the mutual dependency between provider and consumer is where the balance begins. BTR providers are much more dependent on the ongoing satisfaction of their residents, who are seen as customers and far removed from the vulnerable ‘tenant’ that might have previously been subject to the whims of one-off Private Landlord’s. Get your BTR offer right, and continue to get it right and you will retain your customers. Your customers will also speak for you: via friendship networks and social media, when you are trying to fill your apartments. Get the quality of design and efficiency of your operation right and you will continue to achieve your projected Net Operating Income (NOI) over the course of your investment. Simply put, if you undervalue your customers or low ball on quality of product or service, the outcomes are entirely predictable.

 

So, at the apex of our virtuous triangle we have customers whose continued custom is inextricably bound up in the success of a BTR initiative – as we say, happy people will give – and continue to give - you money!

 

How does this help the housing crisis?

 

BTR is a nascent segment of the residential market and over the 5 years that BTR has been around it has produced only 30,000 completions. A figure which pales given the targeted national housing need of circa 300,000 per year. However, institutional investors are now persuaded that BTR is a bankable investment vehicle and an estimated £6 billion is already committed, with a further 110,000 units under construction or in planning. Given that a typical BTR project only begins to wash its face at around 150 units, the ingredients for the delivery of a meaningful contribution towards addressing the UK’s housing shortage is there for all to see – more good quality homes for the UK’s population from a previously unanticipated investment stream.

 

This takes us to the second point of our virtuous triangle: speed of delivery.

 

Unlike homes that are constructed for the sales market, where there is an incentive to balance the supply/demand equation in favour of the creation of scarcity to maintain pricing aspirations, BTR is about speed of delivery.  As soon as the button is pressed on a BTR project the clock starts ticking and the race is on until rent stabilisation is achieved. Indeed, BTR operators regard the construction process as a mere bump in the road in the life of their investment. The sooner a development can be completed, the sooner the ‘money machine’ starts to earn its keep!

 

Also, the benefits of completing projects that offer a substantial critical mass are recognised by developers and towns and cities alike. BTR, with its forensic focus on customer experience is the ideal catalyst for regeneration projects – bringing early-stage community building energy and place-making attributes to their locations far quicker than their for-sale counterparts. For this reason, BTR initiatives are now being seen as vital components in large scale regeneration projects across the country.

 

The ‘need for speed’ takes us to the third point of our triangle: innovation

 

The construction industry is renowned for its sluggish adoption of innovation. We hear regular talk of how cyclical downturns and a dwindling labour force get in the way of creating sustainable pipelines - business that could offset the investment required to take advantage of truly innovative delivery techniques and technology. This is all changing and BTR is playing no small part. The ambitious delivery projections of its participant’s means old delivery methods are being completely re-evaluated. The elimination of risk is a key objective of every construction project, but never before have the drivers for the advantages gained from forcing out risk, dovetailed so eloquently with the drivers for quality and, most importantly, the need for rapid delivery.  BTR business plans are predicated on scale. How do you deliver scale quickly along with reliable quality and cost? One only need look at the automotive and manufacturing industries – and there is not a man with a cement trowel high on a rain-swept scaffold in sight!

 

L&G has already taken the plunge by investing in their own factories to facilitate the delivery of their housing product. Geraghty Taylor is part of a consortium, alongside Cogent Consulting and Peter Dann, that is at the prototyping stage in the creation of modular apartments for a US client who have targeted the completion of 10,000 new homes over the next 5 years. Far from feared identical cookie cutter boxes, these approaches offer high quality, factory-made homes delivered at speed and possessing all the individuality and context specificity as any scheme built in situ.

 

From a production perspective, such initiatives are only possible with effective collaboration between professional and construction teams, coupled with the application of technology as is so robustly argued for in the Farmer Review, Modernise or Die - the unflinching analysis of the construction industry and the changes required to safeguard its future.

 

If nurtured carefully, BTR has the potential to positively benefit multiple stakeholders on multiple fronts: investors are incentivised to play a long term game and still enjoy the financial returns that will justify their efforts; towns and cities have a new and effective catalyst for the creation of high-quality people-centred built environments; the construction industry has a vehicle through which the fruits of investment in innovation and modernisation can be clearly seen and perhaps most importantly of all Britain’s population will have a housing alternative that carefully listens and rapidly attends to their needs…sooner rather than later.

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

 

Happy People Give You Money

Designing for BTR requires the creation of an designerure that supports excellent customer service, integrating an efficient operating model into an attractive product that creates a sustainable long term income for the investors and a good living experience for residents.

 

Designers have to ask the strategic and searching questions about what the BTR business model expects from its building, at what cost, and how the building could be expected to perform over time. To do this, we must ‘create differently’ as the design for long term revenue is about starting with the customer: defining what products, services and amenities will be offered, and how the customer interaction with the business model should be managed.

 

In BTR the source of revenue is the individual resident or customer and is generated through rent and services. This places BTR firmly in the culture of a consumer market where keeping the customer happy and loyal is key to securing ongoing revenue. In good BTR the customer is at the center of design, operational and income generation dynamics.

 

Good quality BTR design will offer a product that will be attractive to the market and also provide flexibility to respond to trends or shifts in consumer behaviour. The Designer and Operator must work closely together to define the customer experience and to agree on the optimum balance between capital expenditure and operating costs. With this information, a design team can create solutions that support these business objectives. In other words, defining and controlling the customer experience is the key to defining good design, predictable operational costs and sustainable revenue.

 

We call this creating a brand. It can be limited to a single project or underpin a portfolio. Geraghty Taylor has a proven methodology that starts with setting the expectations for revenue, product, service and business requirements. These are the ‘brand business objectives’ and will inform the creation of ‘brand values’. These values describe the experiential, cultural and communicable elements of the brand, and with them, the process of creating the ‘BTR customer experience’ can begin. As designers, we must translate these into a product proposition, and for this we use our ‘brand chassis’ ME, WE, FRONT, BACK that describes the four key elements of customer experience:

 

ME - my private spaces
WE - shared spaces and places
FRONT - front of house or technology interaction with customers
BACK - back of house support and logistics

 

 

Ideally, a BTR brand is built up independently of a site or location. The brand is then used to inform and guide the designerure, interior design and placemaking on specific sites. A brand helps to describe the requirements of all stakeholders from investors, operators and through to customers. The more richly detailed this information, the easier it will be for the designer to design better solutions for you and your customers.

 

From a purely design perspective, it is very important that both the interior and designerural design is closely integrated from the beginning of this process. At Geraghty Taylor, we believe that the best way to do achieve this is to ‘design from the inside out’ thereby ensuring that the customer experience and operating requirements are central to all design decisions. The customer experience is not limited to the building itself, it extends to placemaking and the integration of the new building into the local community. Thorough context analysis enables designers to develop ideas for the building and its amenities that will support the new the BTR customer experience and complement the local community and amenities.

 

A well thought through brand also creates benchmarks that will underpin your business, bringing consistency and predictability to the design of the product, its procurement and operation. It will also help with site selection. Design your Brand Before your Building so you, your designer, your procurement and operational teams, but most of all your customers, know what to expect. Done well, this will result in a marketable BTR offer with efficient and predictable operating costs. With a solid product and operating base, revenue-generating strategies can be deployed. This is all underpinned by a commitment to customer satisfaction and providing an attractive product.

 

In very simple terms happy people will give you money. So in BTR, our priority is to get them happy with a well thought through offer, and then keep them happy!

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

Designing for BTR requires the creation of an designerure that supports excellent customer service, integrating an efficient operating model into an attractive product that creates a sustainable long term income for the investors and a good living experience for residents.

 

Designers have to ask the strategic and searching questions about what the BTR business model expects from its building, at what cost, and how the building could be expected to perform over time. To do this, we must ‘create differently’ as the design for long term revenue is about starting with the customer: defining what products, services and amenities will be offered, and how the customer interaction with the business model should be managed.

 

In BTR the source of revenue is the individual resident or customer and is generated through rent and services. This places BTR firmly in the culture of a consumer market where keeping the customer happy and loyal is key to securing ongoing revenue. In good BTR the customer is at the center of design, operational and income generation dynamics.

 

Good quality BTR design will offer a product that will be attractive to the market and also provide flexibility to respond to trends or shifts in consumer behaviour. The Designer and Operator must work closely together to define the customer experience and to agree on the optimum balance between capital expenditure and operating costs. With this information, a design team can create solutions that support these business objectives. In other words, defining and controlling the customer experience is the key to defining good design, predictable operational costs and sustainable revenue.

 

We call this creating a brand. It can be limited to a single project or underpin a portfolio. Geraghty Taylor has a proven methodology that starts with setting the expectations for revenue, product, service and business requirements. These are the ‘brand business objectives’ and will inform the creation of ‘brand values’. These values describe the experiential, cultural and communicable elements of the brand, and with them, the process of creating the ‘BTR customer experience’ can begin. As designers, we must translate these into a product proposition, and for this we use our ‘brand chassis’ ME, WE, FRONT, BACK that describes the four key elements of customer experience:

 

ME - my private spaces
WE - shared spaces and places
FRONT - front of house or technology interaction with customers
BACK - back of house support and logistics

Ideally, a BTR brand is built up independently of a site or location. The brand is then used to inform and guide the designerure, interior design and placemaking on specific sites. A brand helps to describe the requirements of all stakeholders from investors, operators and through to customers. The more richly detailed this information, the easier it will be for the designer to design better solutions for you and your customers.

 

From a purely design perspective, it is very important that both the interior and designerural design is closely integrated from the beginning of this process. At Geraghty Taylor, we believe that the best way to do achieve this is to ‘design from the inside out’ thereby ensuring that the customer experience and operating requirements are central to all design decisions. The customer experience is not limited to the building itself, it extends to placemaking and the integration of the new building into the local community. Thorough context analysis enables designers to develop ideas for the building and its amenities that will support the new the BTR customer experience and complement the local community and amenities. 

 

A well thought through brand also creates benchmarks that will underpin your business, bringing consistency and predictability to the design of the product, its procurement and operation. It will also help with site selection. Design your Brand Before your Building so you, your designer, your procurement and operational teams, but most of all your customers, know what to expect. Done well, this will result in a marketable BTR offer with efficient and predictable operating costs. With a solid product and operating base, revenue-generating strategies can be deployed. This is all underpinned by a commitment to customer satisfaction and providing an attractive product.

 

In very simple terms happy people will give you money. So in BTR, our priority is to get them happy with a well thought through offer, and then keep them happy!

 

#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

In Search of Scale

One of the biggest challenges facing operators in the new BTR market in the UK at present is how to create scale in their business. Recent weeks have seen two fascinating and novel approaches to this challenge; partnering with developers and simple acquisitions.

 

At the start of last month, Telford Homes told us that they anticipate that 50% of the units they will deliver this year would be for rental. Just a few weeks later they let us know how they will finance them. They are partnering with seasoned BTR investors, Invesco Real Estate and M&G Real Estate. M&G will be forward funding schemes with less than 200 units with Invesco coming into fund the larger developments. In capital terms, 200 units is likely to represent deals of between £75 million and £100 million. With Telford homes existing land-bank to draw upon we can anticipate some 1,000 units being delivered in the next couple of years.

 

Towards the end of last year, we saw a deal between Blackstone and Sage Housing, a housing association operator, to fund the delivery of affordable housing in the UK. Blackstone needed scale in the operation and couldn't afford to wait to build its own portfolio. This route could see them involved in the delivery of more than 20,000 homes over the next 5 years. Funding an existing operator clearly appeared an innovative, if mildly controversial, way of investing in UK housing at scale, quickly.

 

In January, CBRE Global Investors announced it, too, will partner with registered providers. Its CBRE UK Affordable Housing Fund has held a first close of £250 million with 13 institutional investors, including social investment institution The Big Society Capital. The chosen registered providers will manage the assets and will be responsible for the rental income, maintenance and property management.

The other way of achieving scale is, quite simply, by buying it. Clearly, it takes time to build scale organically by developing out your own units. American giant Cortland announced in March that it is intending to acquire the £400 million Dandara regional rental portfolio. This will give them a further 2,000 units across the UK, in cities like Manchester Birmingham and Leeds. There is also an option to buy further sites in the future in Glasgow and Aberdeen, to deliver another 3,000 units

 

Cortland is looking to have 50-65% of their units in outer London and the M25, with the remainder in regional centres. It plans to build a £4 billion pipeline of 10,000 homes across the UK.

 

Invesco has already used this approach having acquired the Platform portfolio from Westrock; a £116 million, 580 unit portfolio split across five buildings, in March 2017.

 

In the light of all this activity, Geraghty Taylor has been busy providing due diligence advice to help clients review existing built schemes, as well as schemes moving to planning, to review their suitability for BTR operations. The experience built up, in delivering 10%+ of the existing built stock of BTR, positions us well to add value and suggest interventions to get the most out of investments.

 

No doubt, these deals will herald many more where existing owners looking to cash in their hard-earned profits from creating rental portfolios and we will see other volume house builders and Housing Associations forming similar funding relationships to Telford Homes with other BTR investors in the future.

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

“Engaging the future” – MIPIM Special

The theme at MIPIM 2019 was “Engaging the Future”.   In real estate, most of us will immediately think of the new PropTech initiatives. But look at the definition of innovation and you see it is “a new thing or a new method of doing something"

 

At Geraghty Taylor, our watchword is "Create Differently". Doing things the way the industry has always done them is simply not good enough for us.  Sure, when that approach was used for the first time it was the best option, but you know the saying credited to Einstein; “doing the same thing over and over again but expecting different results, is the definition of insanity”.  Guess this makes us disruptors!

 

BTR is a case in point and needs new approaches.  If we thought in the traditional way we would end up with sub-optimal, adapted "for sale" units, lacking the crucial components of community, amenity and service. With these in mind, let’s think about two key areas in the BTR context; brand and offsite construction.    

 

We see innovation, clearly, in our methodology; #BrandbeforeBuilding, which takes a critically different approach. Until we have established a complete business identity for the project we don't even think about design. To us, this radically different approach to defining the traditional project brief is as much a disruptive technology as any software app.

 

From the outset, we consider the needs of all the stakeholders in the project and look to deliver acceptable dividends to them whether these be measured financially or otherwise.

 

Planners and city leaders will be looking for places that add to the community and ease pressure on housing. Investors and operators will be looking to the long-term financial returns; not just simple gains on sale at completion. And, of course, the occupiers want to be treated like customers and feel that they have truly found “home”. Increasingly, we are realising that these apparently differing requirements are actually fully complimentary.

 

Defining brand critical elements is so powerful in controlling the construction process. Value engineers throughout this process know what they can and cannot touch and so don't undermine those dividends.

 

The use of offsite techniques is also a perfect example of innovation in BTR. There is great synergy between BTR and offsite methods, particularly modular volumetric.  BTR is a solution aimed at providing residential units at scale and benefits from rapid delivery. It gets heads on beds in the shortest time.  Modular delivers this speed of construction and high-quality components for comparable price.  As odd as it sounds, this speed of delivery can conflict with the aims of the housebuilder who often artificially controls supply in order to manage values through the sale cycle. This is one reason why modular has seen slow take-up, despite the ever-worsening conditions in the construction industry. (see The Farmer Review – “Modernise or Die”) #MODIE

 

We see off-siting not as a procurement decision but as part of the business strategy. All our buildings are designed to be compatible with offsite techniques though all can be built traditionally.  We will increasingly see BTR developers using modular.  Greystar, for instance, is currently building the world’s tallest modular buildings in Croydon. They are procuring their modules from the UK.  Other clients we are working with are looking to import units into the UK from further afield.  It could well be that your next bedroom will find its way onto these shores on a container ship from the Far East. Some forward thinkers, like L&G, are even making a substantial investment in securing their own procurement source.  Legal &General Modular Homes have created their own factory in Yorkshire.

 

You will no doubt have seen some amazing new PropTech at this year’s MIPIM but innovation is not all about apps and software. The most powerful tool of them all is in your head.

So think and Create Differently!

 

#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

Legal Disclaimer       |         Copyright © 2019 Geraghty Taylor Designers. All Rights Reserved.

What has changed in the BTR world since MIPIM 2018?

The UKs skyline is changing….with BTR playing a major role

 

Cast a curious eye around any major transport hub in London, Manchester, Birmingham or Leeds, and you can’t fail to notice significant changes to the surrounding area. Green Belt constraints mean most cities can't grow out - so they are growing up, and we are probably witnessing the greatest upheaval in the UK skyline in a generation.

 

BTR development increasing pace

 

Residential and BTR in particular, is now the single most important driver of change. According to figures from the British Property Federation (BPF), the number of BTR units under construction has grown by 40% in the last year. More encouragingly, completed units have  increased by nearly a third and have seen a big step up in quality - purpose built schemes (70%) have overtaken permitted development rights (pdr) conversions (which account for 30% of London’s currently completed stock). Expect more real data on take-up, price premiums, time to let and customer satisfaction flowing from this additional supply.

 

It’s not just a London phenomenon

 

The expected growth outside London has materialised... mostly into the big 5 cities. Lack of sites, but growing confidence has seen developers exploring other smaller cities. Half the completed stock of BTR is now outside London and there is even more under construction (55%) – the phenomenon is spreading.

BTR has become big business

 

Our independent research has found that 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 the BTR marketplace.

 

 ….and it’s delivering rental premiums and growth

 

 Several commentators have identified that the theoretical rental premium, so prized by BTR operators, has materialised in the market. One report by Colliers showed professionally managed BTR apartment blocks achieved an average premium of 9.9% (for one bedroom) and 9.4% (for two bedroom apartments) over a comparable Buy-To-Let (BTL) flat, in the first half of 2018.  What’s more, these premiums are marginally up from last year’s figures, which correlate with the findings that rental growth has been stronger in BTR schemes than in the wider private rented sector in the UK.

British BTR design is not simply importing US multifamily

 

There has been a polarising of investor interest on larger schemes with 150 now being viewed as a minimum. Schemes of 300 plus units now regularly feature. High-rise is often the route to these higher densities. But this is not the high-rise of old. The BTR industry has occupier satisfaction at its very core.

The importance of customer satisfaction is now accepted. One of the crucial satisfiers is simply seen as just good old-fashioned quality service. The clamour to identify the killer-amenity has subsided and flexibility of amenity offering is now paramount.

Some of the most appealing BTR schemes are now just part of wider mixed-use urban development. The critical role of place-making has been well recognised this year and the need to deliver a thriving community underpins the creation of successful BTR investments.

The target demographic is evolving too.  This year it is not so much the millennial but the millennial-minded.  Many operators have been surprised at the wide variety of occupiers that have been attracted at both ends of the age spectrum. This has prompted constructive discussions about the value of mixed age communities.

A few interesting projects have looked at BTR as the appropriate tenure for schemes which would previously have been developed as single family, “for sale” units.  15% of the schemes in the pipeline include houses rather than just high-rise.  Modern, flexible design solutions can deliver the longevity of investment income required by investors.

 

#Brand before Building

 

BTR was the flag-bearer for the arrival of Brand to the Residential markets during the year. Brand is so much more than a catchy logo. It underpins the very objectives of the operator’s business and influences all aspects of their customer offer. It adds enormous value in other consumer markets and we expect it to do the same in BTR.

 

Modern construction methods at the forefront of BTR

 

Offsite construction has become a crucial consideration in BTR strategies. We would argue it is an integral part of any business strategy rather than a scheme by scheme option. Forward-thinking operators design all their buildings around modular specifications but with traditional construction techniques optional.

Greystar is building the tallest modular building in the world in Croydon with two towers of 38 and 44 storeys for BTR.  There is a clear synergy between BTR and offsite construction.  Speed to delivery and exacting operational standards are key.

Serious players are now thinking well beyond the individual scheme and initial construction, indeed to many, the construction of a building is being seen as a ‘bump in the road’ towards the ultimate delivery of their long term income. Supply chain management is a clear differentiator in established multifamily operators and is coming to the UK.

 

Ops are crucial to the success

 

The realisation that a new approach to traditional property management underpins successful BTR is now clear.  New entrants and rebranded businesses have come into the market this year with a range of different propositions and ambitions.  Fully consider your options.

 

Funding appetite remains very high

 

On the funding side, there have been a plethora of BTR fund launches and announcements.  More funds, in fact, than managers that can demonstrate they have a track record of successfully creating a BTR building.  Is this a valid investor concern? Well, it certainly is delaying the fundraising activities of some.

The latest IPF survey was actually a bit cooler in terms of intentions towards Resi investment at the end of 2018, but this should be viewed as a sensible stabilisation at the previous year's high level, rather than a fall away in interest. There is certainly plenty of money chasing the sector. The problem is the availability of sites.

This year some brave commentators (us and JLL to name two) hinted at the possibility that institutional holdings in BTR could eclipse other sectors in the medium term. JLL drew comparisons with the US and showed that if the UK followed the same trajectory, BTR could usurp offices in institutional portfolios.

 

The Agency world is changing

 

Residential property has stormed into the spotlight in the future strategy of most major real estate agents. Much corporate restructuring has happened and will hasten further next year.  Watch for new Department titles catering for “beds” in all the different formats they are delivered.

Interestingly, JLL has decided to do away with the Brits definition, "BTR", and go for multifamily as their global definition.

 

The public sector view

 

Many local authorities have appreciated the value of BTR to their housing initiatives, but this is not universal. Their role is crucial to successful inner urban development.

Housing associations involvement in the sector is coming under increasing scrutiny. They have the infrastructure, sites and motivations, but how will they respond.

The major issues of planning, affordable content and discounted rents all sit in the background but have seen limited movement this year.

 

More politics...

 

Is Brexit a concern? It is difficult to be certain, but the good news is that BTR offers a local solution to local housing needs and so is widely felt to be broadly immune to specific Brexit risks. It will, of course, be subjected to whatever economic outcomes ensue.

More frequently discussed at present is the potential threat, as many see it, of a Labour Government.  Would they re-introduce rent controls?  The industry is pretty sanguine about this, believing that it is helping fulfil a very real need for more housing and that sensible dialogue should see compromises that would allow BTR to continue to develop.

 

But we still need to shout louder!

 

BTR has found a voice within the industry with initiatives by the UKAA, ULI, BPF and others. It has a name, but one designed for those involved in the creation and management of stock. It still lacks consumer identity with its customers. Who goes out "to rent a BTR"?  Product differentiation can only improve with more identity as more units come to market.

 

#BTR   #BuildtoRent   #Brand  #Brandbeforebuilding

Saxon house
48 Southwark Street
London
SE1 1UN

+44 20 3696 5530

design@geraghtytaylor.com

Legal Disclaimer       |         Copyright © 2019 Geraghty Taylor Designers. All Rights Reserved.

Why is brand so important to Build to Rent

Why is Brand so important to BTR....or put another way...why are designers embracing brand when what they do is design buildings?

Ultimately, we can’t design the building without a thorough understanding of the business strategy that the building is supporting. This is best defined by its Brand.Brand in most peoples’ minds means a fancy logo. But if you consider it for a moment, you realise that logo conjures up a mental picture of what the product is, who it is created for, its quality, the service behind it and, ultimately, the price you will have to pay for it; all gleaned from that fancy logo. So clearly, from the business operator’s perspective, the brand associated with the logo embraces the entire business philosophy and strategy of the company.

 

Put this into the Build to Rent context and you can quickly see how brand defines the target audience, the style of the building, the level of services, the provision of amenity and even the price point; all crucial factors in good design. We call this # BrandBeforeBuilding.
Many of the businesses that we are working with do not come from a consumer product background. They are typically from a real estate development, property investment or housebuilding background. Brand, in so far as it applies to their product, has not previously been a mainstay of their businesses. You might think this only has relevance to the long-term operator/investor. Surely a developer looking to exit on completion or even at planning doesn’t need to be bothered by brand. Well, they do if they want to reach the widest buyer market and get the best price. We are working now on schemes where the developer will exit on planning, but we are integrating what you might call a white-labelled, loose brand into the scheme to allow the future operator to shoe-horn in their own brand.

 

Brand in BTR is very new with only a few operators having a completed model. Even those internationals with long-established brands need to put it into a UK context. When we work for an established US multifamily operator, for instance, we must first get a thorough understanding of their existing brand values. We then need to discuss how these might be adapted for the UK marketplace and then the specific building in question. A true brand integrates all parts of the provider’s business plan and BTR offer. It acts as a differentiator between providers and helps the consumer navigate and select between them. A good customer experience builds trust and loyalty and gives more brand buy-in. As a brand develops, it generates engagement with its customers, making them feel comfortable with its specific lifestyle offering.

 

In BTR, this will deliver lower voids by increasing renewals, extending the length of leases and increasing the number of customer referrals to like-minded buddies. Done well, it will maximise net operating income and deliver business success. This builds a reputation and enhances customer experience. We have explained this BTR Brand Value Loop in a recent infographic. Take a look.

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

Saxon house
48 Southwark Street
London
SE1 1UN

+44 20 3696 5530

design@geraghtytaylor.com

Legal Disclaimer       |         Copyright © 2019 Geraghty Taylor Designers. All Rights Reserved.