With four fantastic speakers and a great moderator lined up as well as with a particularly challenging yet exciting topic on the agenda, the “Build to Rent” event from the ULI Innovators & Disruptors series on 4th May was bound to be a success. From insights on funding and viability for the Build to Rent sector, through presentations on issues associated with designing and delivering successful BTR schemes in the UK, to a discussion around the numerous questions raised by the audience – all of this helped underpin a truly multi-disciplinary conversation on the future of living in the UK.
To understand the nature and challenges of the unique – and still new in Europe – real estate sector, the audience were joined by a formidable panel formed of experts who have been at the forefront of BTR innovation for the past decade. Firstly, Michelle Hannah from Cast Consultancy explained the financial issues associated with building for rent instead of for sale, based on her experiences providing advice on viability for clients and investors in mixed-use developments as well as on the strategic and operational side of their projects. Due to the lower values and longer-term investment horizons of BTR investors compared to investment in developments for sale, lower profit margins of circa 10% are acceptable – compared to 17.5-20% for non-BTR projects. As a result, the viability of BTR schemes is often more challenging, with a new form of Affordable Housing – Discounted Market Rent (DMR) – used increasingly more instead of traditional forms of AH such as Affordable Rent or Shared Ownership. Not only do BTR developments tend to be able to secure lower levels of AH during negotiations with Local Authorities but also DMR fits in with holding and managing entire developments in the longer run. Michelle also touched upon ways to maximise BTR value, not only in terms of adding amenities that can be monetised such as a gym or commercial units but also in terms of ensuring lower tenant turnover and making people want to stay in a building by creating integrated communities. Gradually more evidence is becoming available in the UK as more data from purpose-built BTR is analysed, with increasingly more operators considering for example the rental premium achievable through adding a rooftop terrace for the residents before committing to the cost of providing one. Also, non-conventional methods of construction and management are used to improve efficiencies and returns – but challenges are not absent in these aspects either, with e.g. construction using components that have been manufactured off-site requiring more cash commitment earlier in the project. At the same time, BTR schemes have to be built around the concept of flexibility because target markets and renters’ expectations can change over time – making the rental stock obsolete very quickly.
Leading the design of cutting-edge buildings and communities than can stand the test of time, Russell Pedley from Assael Architecture then followed with his presentation – focused around the findings of his research and experience over the years, spanning continents and project briefs but ultimately culminating in two editions of the ULI Build to Rent Best Practice Guide which he co-authored. Because BTR is all about maximising the Net Operating Income (NOI), it requires a different set of principles to guide its design compared to conventional build. Additionally, to minimise voids and be able to charge higher rents, the “customer experience” is key – starting from amenities available for residents, through the intangible spirit of the place, to a dedicated on-site team (building manager, concierge, lettings manager, etc.) that has presence around the clock. All those are what makes BTR stand out, particularly in a country where property has traditionally been rented out by non-institutional landlords with little management experience. Whether small-scale or high density, Build to Rent is about so much more than renting just the individual flat – hence a BTR building should ideally consist of the following 4 zones:
- front of the house – increasingly more publicly accessible in order to increase footfall for any commercial uses as well as attract new potential renters to the product offering;
- residents’ only shared area – e.g. crèche, gym, car club or rooftop terrace (either included in the rent payable or charged extra depending on usage);
- residents’ private area – with equal bedroom sizes and separate bathrooms key for sharers, with private balconies desirable and with open-plan living accommodation; and
- back of the house – focused on moving people in and out of properties smoothly and without disturbing the flow of the 3 other zones (particularly key due to relatively high turnover of residents compared to privately owned developments), parcel storage, etc.
Delivery of Build to Rent properties has been revolutionised via modular design and construction, the area of expertise for Assael’s Alex Johnson. Not only has BTR been a game-changer in terms of its innovative approach to long-term management and the putting of customers first, but also in terms of the somewhat increased appetite of BTR operators and investors to test less well-known construction methods to speed up delivery – and therefore to improve project cashflows. Alex shared his experience on volumetric modular construction and off-site manufacturing with the audience, referring to the importance of both scale and of standardization of cores and corridors as key to successful modular design and delivery. Having floors and components that align throughout the building (including wet and dry modules positioned in the same areas) helps speed up both the manufacturing and the on-site assembly process, making the time period between build cost expenditure and rental income shorter. Modular construction delivers also in terms of quality, Health & Safety and predictability of performance as well as produces much less waste and disturbance when works commence on site. However, it is heavily constrained in terms of what can be designed and built by weight, height and width restrictions imposed by lorry loads for transportation and by the industry’s production capacity. For instance, a module can be on average 4 metres wide and – due to structural limitations – the tallest modular building to date completed in the UK has been 24 storeys. Nonetheless, particularly as buildings manufactured off-site can easily blend into the wider urban landscape in terms of their external facades, Alex and the team at Assael believe there to be a lot of future potential in this area of construction – and the projects currently being delivered by Assael via modular are certainly proof of that.
Equipped with 3D models and CGIs, Rory O’Hagan was the final speaker of the evening who drew some conclusions about Build to Rent based on his experience in designing and implementing residential and mixed-use scheme throughout London and the UK – highlighting the practicalities and challenges associated with taking the alternative path to property development. Rory’s focus was around two of Assael’s standout BTR projects – Creekside Wharf, Deptford in Greenwich (designed for Essential Living and currently on-site, being built using modular construction) and Ferry Lane in Walthamstow (designed for L&G and currently at detailed masterplanning stage).
Comprised of two buildings, a taller tower for the “millennials” and a shorter building for families, as well as offering the first truly pepper-potted and tenure-blind Affordable Housing in the form of DMR, Creekside Wharf is gearing up to be a new scheme for all generations. With density pushed up to provide 250 units, the modules for the taller block are now being delivered on-site to start assembly which – although slightly more expensive than traditional build – will accelerate the return on investment. The construction has also been sped up (anticipated 1 floor per week) and simplified even further through the design process which ensured that only corridors and services are contained within the core and hence need to be delivered separately, with all the apartments (limited to 15 standard types) delivered fully fitted-out as part of the modules. In addition to over 75% of the Ground Floor area being open to the public, there are a number of additional elements inherent to the scheme that will contribute to making a lasting impact on the reinvigoration of the neighbourhoods surrounding Creekside – amongst all through providing shared spaces such as an allotment garden, pets’ corner or library and facilitating community events such as a farmer’s market – in response to public consultation and focus groups.
With 450 units and 68% open public realm (including a new civic square and a park), the Ferry Lane scheme is going to be just 18 minutes from Oxford Circus – however, located on the banks of the Walthamstow Basin, it will utilise the beauty of its natural setting. It will certainly not be yet another clinical new build scheme in a trendy commuter location, but will offer something both for the local community (e.g. Ground Floor “forum” atrium accessible to all and usable for local events) and for new businesses (e.g. flexible commercial space – could be a grocery store or a microbrewery or co-working space). Taking into account the wider setting of the BTR building and making sure the design corresponds to as well as enhances the area is key to success.
Key learnings from the panel discussion moderated by Ashley Perry from JLL included:
- although not the most obvious choice from the point of view of security – opening up the Ground Floor amenity space can be beneficial and convert more people to renting in a building if it represents it from the best perspective and has a good “vibe” about it;
- Build to Rent has an additional hurdle to jump in terms of attracting customers – it tends to be more expensive than conventional renting from Buy-to-Let landlords and therefore people who only search for homes using property search engines such as RightMove and restrict their budget to a maximum tend not to come across BTR offerings; the solution to the problem is engaging local agents to help direct enquiries and facilitate faster let-up (as has been achieved by Grainger at Abbeville Apartments in Barking where 100 units were let in a record time of 6 weeks) and having widespread marketing campaigns;
- through attracting people with unconventional jobs or working arrangements, BTR has to be adaptable to different forms of working – for example to working from home (e.g. foldout desks) or shared spaces, or to flexible working hours (e.g. good sound insulation);
- although the focus of BTR investors and developers has traditionally been on London and its commuter belts, there are a number of “emerging locations” which according to the speakers have the potential to become – or are already becoming – next rental hotspots; amongst them are locations where PRS operator Platform is already present (such as Sheffield, Leeds or Birmingham – which are additionally closer to modular construction factories), areas around Crossrail 2 stations (9 of which will for instance be in the London Borough of Kingston), Dublin and urban Ireland as well as rural areas of England which can become home to lower-density BTR in the form of houses, already popular in the USA;
- the fact that the UK is circa 20 years behind the USA in terms of BTR is partially owing to the UK’s obsession with homeownership and hence renting not being a tenure of choice, partially due to valuations (whether for debt or for acquisition) traditionally being based on Vacant Possession Value when properties are empty (not on Net Operating Income when they are cash-generating), and finally due to the cyclicality of residential real estate – which makes the market a risky niche for a lot of the more risk-averse investors;
- if anyone needs any more convincing – the convenience factor of BTR developments is one more feature that makes them stand out from other rental living arrangements, with for example all utility contracts in place, all (or most) shared amenities included in the rent and a single point of contact in terms of any queries or issues with the flat.
Thank you very much to all the speakers for sharing some incredibly interesting insights into their work – also to Russell and Rebecca at Assael for hosting us so kindly and generously! Stay tuned and keep following ULI for more on one of the hottest, most discussed topics in property. It may not be the perfect solution, but can large-scale Build to Rent help solve the UK’s housing crisis?
Words by Alex Zolyniak