Optimising build to rent returns

Build to rent homes are becoming an increasingly important addition to the UK residential market. Project manager Sean Cook and cost manager James Barton highlight some key factors to consider when developing the schemes that could help generate profitable returns for developers and stable, long-term income for investors.

The UK build to rent (BTR) sector, comprising purpose-built rental homes that are professionally managed and institutionally owned, is booming — the BTR development pipeline grew almost five-fold between 2013 and 2017, according to Savills research. British Property Federation figures show around 120,000 BTR homes were either completed, under construction or in planning as of spring 2018.

Driving this growth is an almost-perfect storm of the systemic undersupply of new housing, stagnated salary increases and post financial crisis mortgage lending restrictions.  It is putting further pressure on affordable home ownership, especially for first time buyers and increasing the demand for good quality rental accommodation in all locations, with more people renting, and for longer, than ever before — 46 per cent of 25 to 34-year-olds currently rent, up from 27 per cent a decade ago.

BTR opportunities and benefits

Growing rental market demand makes BTR an attractive investment opportunity for large institutions, such as pension and insurance funds, looking to generate long-term revenue and diversify their investment portfolios. While historically the trend with residential has been for quicker disposal, this asset class may enable greater collaboration between more traditional builders and developers and BTR operators who take a longer-term strategy. For renters, BTR properties provide high quality accommodation alongside fairer and more secure rental conditions, with many in the industry seeing BTR as part of the solution to the UK housing shortage.

The potential to maximise returns

As the UK BTR market matures, developers and investors need to follow the principles of good building economics both in terms of capital and lifecycle costs from the outset when considering the specific needs of BTR tenants throughout the property lifecycle to maximise potential operational income. We suggest seven key considerations when planning, designing and operating BTRs to optimise returns:

1 Choose the right location

Location is probably the single most important factor in minimising tenant void periods and maximising income. BTR tends to target locations with easy access to good transport nodes, in growing populations and where people have sufficient disposable income levels to enable a balance between rental payments, lifestyle and savings.

2 Optimise asset strategies

If there is a secret to assisting in maximising returns in this sector, it is to ensure asset strategies are clear from the outset. BTR assets need to be built to last so they can deliver long-term stable income streams for 30 years or more. Clear investment and disposal strategies should be set from the start to ensure the best balance between capital and operational costs needs can be found.

3 Design with the BTR tenant in mind

Industry reports indicate today’s typical BTR tenants are young professionals, but there is no single type of BTR customer. Be it millennials or over 50s, understanding the brand and target tenants’ wants and need is crucial to ensuring the success of BTR communities. What amenities do they expect in common areas? How do they prefer to pay their bills? Is energy efficiency important to them? What size flats or houses do they need? The costs of amenities and designing BTR properties to match tenants’ lifestyles with provision for modern, well considered and flexible facilities should be factored in as part of initial proposals and ongoing operational assumptions.

4 Consider fixed and operational costs

While the approach to financial evaluation of the capital costs for BTR developments tends to be consistent with traditional residential schemes, there also needs to be a greater awareness of the effect of fixed and operational running costs in the longer term appraisal to maximise value across the property lifecycle. Longer term, BTR models need to consider the effect of fixed costs, such as cleaning and repairs, and operational running costs, like concierge services and parcel management, which strike a balance between the level of amenity and service charges. BTRs with reduced fixed running costs will offer investors a greater chance of delivering expected returns over the development’s lifetime, allowing developers and BTR operators to focus on ensuring a positive customer experience and providing the levels of service they will likely demand.

5 Appeal to the right investor

BTRs are long-term assets that yield returns over greater periods of time compared to traditional residential developments. Although BTR investors benefit from rising land prices, the average residential development in the UK can take from three to seven years and beyond before delivering stabilised incomes. Ultimately, as the industry matures, BTRs have the potential to become an institutional-grade asset as in the US multi-family sector. This may be why the experience and approach of registered social landlords have enabled those organisations to more easily adapt to this emerging asset class.

6 Design with flexibility in mind

BTR market conditions will change over each development’s lifecycle. Leases and designs should allow flexibility for tenants, and potential future changes in living trends, such as moves towards more co-living or micro units. Furthermore, the growing influence of disruptive technology and changing consumer patterns increasingly need to be integrated into building design. This could range from adding more storage for the likes of Amazon Prime services and Ocado food deliveries to ensuring sufficient drop-off space for Deliveroo or Zipcar. Likewise, the affordability drive — which can reduce apartment size — will inevitably mean tenants look for greater storage outside of their apartments.

7 Go big on Big Data

Data generation and collection within BTR developments will provide a growing feedback loop for operators and developers, allowing them to understand more about how tenants use the services provided, so they can be adapted to suit their changing needs. The growing ability to analyse and interpret data around consumers’ choices, preferences and interests will be key to maximising the quality of BTR accommodation, amenity and service offerings, and therefore, security of long-term returns.

Design with the future in mind

Ultimately, long-term sustainable thinking is required for BTR to succeed. To maximise returns, developers and investors should work with operators to ensure that the product is built and designed specifically for BTR use. Commissioning a value-based approach informed by capital and operating costs from the beginning can help enhance the business case and facilities management strategies, and will serve to reduce long-term operating costs by designing with the future in mind.