In October, Women in Property – in association with Eversheds – hosted a fascinating breakfast seminar on the challenges and opportunities facing the build-to-rent sector. Beatrice Dupont, a partner at Venn Partners, chaired a distinguished panel of five leaders in the field: Lesley Chen-Davison, Portfolio and Corporate Finance Executive of Delancey; Laure Duhot, Director of Grainger plc; Gina McMorran of MyCultura (Branding Consultant for Essential Living); Deborah McLaughlin, Executive Director (North West) at the Homes & Communities Agency; and Amber Anderson, Senior Director of Greystar Europe.
The Royal Institution of Chartered Surveyors (RICS) stated this week that home ownership was increasingly unaffordable for many following years of price growth, that 1.8 million more households would be looking to rent by 2025, and that it was recommending government takes a much bolder long-term approach and pioneers a new build-to-rent sector. Build-to-rent, also known as PRS (Private Rented Sector) is the hot topic in tackling the housing shortage.
Beatrice Dupont from Venn Partners steered the panel discussion and explained Venn Partner’s involvement in the build-to-rent sector as the delivery partner for the Department for Communities and Local Government’s £3.5 billion Private Rented Sector Guarantee Scheme. The scheme aims to accelerate the growth of investment in build-to-rent by institutional investors, through the creation of a government guaranteed bond programme that will be used to finance long term loans to eligible build-to-rent operators.
Beatrice started by asking the panel what the biggest challenges facing the sector are.
Lesley Chen-Davison explained that investors have a great appetite for build-to-rent, but a big issue is actually acquiring the land. Lesley explained that a ‘for sale’ appraisal gets a better assessment as the investor gets an immediate return. This means ‘for sale’ developers can pay more for the land which in turn drives up residential prices adding to the housing shortage crisis. Lesley felt that education and greater sharing of information would give investors more confidence. It is an emerging market and investors have historically valued projects on return, not income.
Gina McMorran favoured partnering with land owners and cited Essential Living’s Vantage Point in Archway, where Essential Living partnered with TfL as land owner. Lesley Chen-Davison agreed that this offered great opportunities, especially partnering with councils. She explained that on a sale, the local authority doesn’t get to see the proceeds as this returns to Central Government so it is more advantageous to partner. In her view, local authorities and public bodies were becoming increasingly open and appreciative of the opportunities their land can offer.
Beatrice asked the panel whether funding for build-to-rent was still an issue.
Laure Duhot admitted that Grainger plc was in a fortunate position and already had £850 million to invest. She said there were partners willing to invest in this new asset class and that from 2008 – 2009 investors and pension funds wanted to increase allocation in the build-to-rent sector. These trailblazing investors were looking for long term investment schemes. Funding was not an issue.
Lesley Chen-Davison disagreed, her view being that equity funding is available but borrowing is much harder. She went back to the point that investors do not yet fully understand build-to-rent and preferred pre-sells as a de-risked investment.
Deborah McLaughlin hoped that the scheme would give banks and investors confidence that the government is backing the build-to-rent market.
The feeling among the panel was that it is too early for a separate designation (planning use class). Build-to-rent is still in its infancy and there is not yet enough volume or liquidity in the market – developers want the fall-back position of being able to sell a development if need be.
The panel was not in favour of rent controls either. Gina McMorran thought they would decimate investor levels as investors would not be interested in this loss of control. Gina said that affordability was clearly something which everyone in the sector thought hard about, and so would consider alternatives to rent control such as RPI increases.
Lesley Chen-Davison agreed that rent controls would put a stop to development but that she would be in favour of stepped / discounted rents based on salary.
Amber Anderson and Gina McMorran agreed that a key priority is getting the service model right. The sector is still young and the jury is out with the public. Build-to-rent providers must ensure they don’t over promise and under deliver. Gina also sees opportunities to disrupt the sector, like Airbnb and Uber, and also advocated unlocking land though innovative partnerships.
Lesley Chen-Davison hopes to create a real asset class, a build-to-rent REIT. She said that there is a big demand in the mid-market and would want to see build-to-rent family homes in the regions. Deborah McLaughlin felt that build-to-rent is a very positive product and one which is maturing. Models should be rolled out across the country – not justfor cities but also for areas out of town, and they should be suitable for families as well as individuals and couples.
The future of build-to-rent – which model did the panel favour?
Gina McMorran said that there are different approaches. The true build-to-rent is the US model which offers more space and where service is key. Amber Anderson citied both the US model and the continental European models. She explained that Greystar offers a mix of short-term rental, long-term rental and hotel models. Amber went on to discuss how Uber, Amazon and home shopping had changed the way in which individuals receive and expect service. Build-to-rent gives the industry the opportunity to give people what they want. This does not just mean build-to-rent sites should be highly amenitised, it means the provider should focus on quality at every level, not just at the top of the market. At the moment, most landlords are absent and the tenant has little redress.
For Lesley Chen-Davison, this might mean not charging the tenant fees for inventories and credit checks and offering three year leases with an RPI uplift and a tenant only break. This gives the tenant security and makes them want to stay. Lesley believes that place-making is very important and landlords’ visibility and responsiveness crucial. Gina McMorran thought that there was demand for an inclusive product and said that the Vantage Point’s rents are inclusive of utilities. Gina emphasised the importance of branding and word of mouth and how people bought into brands and trusted others’ opinions. She explained that Essential Living wants its tenants to stay and to upgrade, that build-to-rent should mean a longer term place for people to stay, rather than a stop gap with the ‘how soon can I get onto the property ladder’ mentality.
Amber Anderson strongly agreed that people should be proud of where they live and want to stay there.
Lesley Chen-Davison explained how build-to-rent providers could offer services which tenants want such as additional spaces, storage space, packages services, cleaning, dry cleaning, all add-ons which make tenants happy.
Laure Duhot agreed, saying that these should be family homes where people are entitled to a great quality of life, even if they are never owners.
The panel went on to discuss the importance of community and neighbourhood in build-to-rent developments. Laure Duhot spoke about Grainger plc’s build-to-rent development in Barking, Abbeville Apartments, where there are 100 apartments, a gym and a coffee area. When the development was first completed, Grainger thought most tenants would be 30 something professionals. In fact, they attracted a number of families. The coffee area is used as an informal homework club by the parents at 4.30 pm, while other tenants will hold business meetings over coffee at 10 am. Build-to-rent amenities and open spaces are seen as an extension of the home. Some will include kitchens and club houses which you can rent. Amber Anderson pointed out that people want to be ‘apart but together’ and this is why people take their laptops to cafés to work rather than stay at home. Gina McMorran spoke about opening up the ground floor spaces to non-residents. Essential Living’s Creekside Wharf in Greenwich, due for completion in 2018, will offer an on-site nursery which will be open to the public, thus adding to the revenue stream and making the development a part of the community.
Lesley Chen-Davison spoke about the importance of choosing the right retailers at Delancey’s East Village ‘Get Living’ development. She said that they chose the retailers on the basis of what would add value to the tenants. Local merchants bring local flavour. A Boots the Chemist may have more credit worthiness than an independent chemist for example, but may take the character out of the development. Lesley also emphasised the need for great community areas, telling the audience that when they put up giant screens for Wimbledon, 400 people came to watch, and it was a great atmosphere.
This event highlighted the need for the sector to really engage with what tenants are looking for in rental accommodation. Today, the considerations stretch far beyond the physical property and into the lifestyle choices of the prospective inhabitants.