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Sectors Demystified: Build to Rent

27.2.2019

Real Estate Balance held another in the ‘Sectors Demystified' series on the subject of build to rent on Wednesday 27th February 2019.

The roundtable lunch event, held at the offices of Bryan Cave Leighton Paisner, proved very popular with Real Estate Balance members keen to find out more about this hot topic.

Alex Notay, Lesley Roberts and Andrew Yates, well known practitioners at the forefront of the growing build to rent sector, discussed the way that the market has developed, what “build to rent” (as against “PRS”) really means and the issues that they are seeing around the development and management of successful build to rent schemes. 

As economic issues and Brexit uncertainty have created difficulties for retail and other commercial property sectors, the interest in build to rent is going from strength to strength. Alex, Lesley and Andrew discussed what investors are looking for and some topical issues to think about for those involved in this market.

A light lunch was enjoyed during the talk followed by Q&A and networking. 

We would like to thank two attendees from PwC, Arjun Shant and Amber Whaley who have provided us with a summary of the talk (below).

Major talking points included:

PRS vs BTR: Defining BTR: forms part of the wider Private Rental Sector but are scalable properties, minimum 100 units, but more likely 1000 units to support the cost of professional management and attract the institutional investor, vs the traditional private landlord who owns a handful of flats. BTR offers long-term stability to tenants as there is no risk the landlord will suddenly decide they want the property back.

Quality: A lot of early "BTR" properties that were testing the water are now being offloaded in the market because they were retrofits rather than true BTR and so were limited in how much could be customised. As a result, the expectation is for new sites, designed with long-term renters in mind from the ground up, will likely perform better.

Demographic: it was initially thought BTR would only appeal only to millennials and carry a lease-up term of 3 months. An early property example was fully let within 6 weeks, and included a number of families of 2-4. With government support existing for senior living and low-income housing, there is a squeezed middle segment who have been priced out of ownership that are demanding the BTR space as it provides better amenities and quality that traditional PRS.

BTR as an asset class: Akin to hotels in that asset quality can be on the spectrum (i.e. budget through to luxury), countercyclical and provides a good inflation hedge.

Community: Building a sense of community is integral. Schemes need engagement with those living in the local area to avoid the asset (both from a residential and commercial aspect) being treated like an island and being isolated. Management should consider ways to create inter and intra asset networks and communities (e.g. hold events within the building, workshops with community leaders etc).

Senior BTR: A lot of discussion on this topic with attendees from Lendlease; PfP and Grosvenor voicing a string thematic of 55+ looking to downsize and needs somewhere convenient still to work, travel into the city and have local amenities. Referred to it as a more active / pre-retirement living.

Gross to Net: There was discussion around an appropriate gross to net for BTR. Largely dependent on how active management will be, as well as on the level of amenities / service level planned from the start. On average c.25% is seen as normal, however the consensus was that the more hands on management are the more consistent income will be (as customers tend to stay for longer periods).

Other: points around how to value BTR (e.g. do you value as a business off of NOI, or do you value individual units as the break-up value if the market turns); tenure and active rent management were also discussed.

With thanks to Amber Whaley, PwC - Transaction Services, and Arjun Shant, PwC - Corporate Finance.