‘This Could Be BTR’s Moment To Make Its Case’

You don’t really know how resilient a new sector is until it has been through a recession. In that sense, UK build to rent is undergoing trial by fire. 

The sector is well-positioned to outperform other areas of real estate, according to a panel of experts on Bisnow’s BTR During And After Lockdown webinar, presented by Pinsent Masons. Some of the ways in which the sector operates are changing because of the coronavirus pandemic. But if it can prove itself resilient to its first real test, interest in the sector is likely to increase. 

“There are groups that are already participating, but there are other groups for whom how BTR and BTR platforms behave during this period will be really interesting,” Homes England Senior Director Jennifer Murray said. “This could be the sector’s moment to make its case — in terms of being a responsible landlord, in terms of the quality of what is being built compared to build for sale, and also in terms of how the investment behaves. 

“One of the biggest hold backs to the sector for a lot of groups has been the relative short duration of the data we have, and if the investment holds up during this period, then that will make the case for the sector more widely.” 

There is little data about the resilience of the rent being paid by tenants of UK BTR, but one datapoint is Grainger, which said it collected 94% of its rent in April.

Cortland Partners Chief Investment Officer Mike Altman gave a view from the U.S., where the sector is more mature. He said the firm collected 98.3% of its May rent from the circa 60,000 units it owns or manages. He said around 2,000 of its customers had asked to be put on payment plans and pay reduced rent, equating to about 3%, but of the customers on those plans, the rent collected was 35%, so even those people struggling were paying something. 

On the operational side, he said there had been a 28% slowdown in new site visits, but 57% of expiring leases were renewed in May, compared to a long-run average of 50%.  

“That reduced turnover, vacancies, frictional costs, keeps occupancy where we expected and [net operating income] right in line in spite of slight collection loss due to employment issues.”

It is that kind of resilient income that will help the sector continue to appeal to investors: As Murray pointed out, the number of new homes completed this year will be lower than anticipated because of the pause on construction precipitated by the coronavirus, and so the long-term imbalance between supply and demand of new homes that makes renting compelling will increase.  

“Investors might think it is more attractive now on a relative basis,” Get Living chief executive Rick de Blaby said. “If you are in retail you’ve had a rough few months. It has got to be long-term money rather than private-equity type money, but I think interest will increase.”

One downside of the crisis for BTR is that the availability of debt will decrease, which will make it unviable for developers to proceed with some schemes. 

He said the social strictures put in place by the virus would increase the appeal of large schemes with significant public realm of the sort it has created at the former Olympic Village in Stratford and Elephant Central near Elephant and Castle.  

“We think our strategy of having big sites with a lot of public realm and teams on-site has probably been validated or amplified because I suspect residents won’t forget this episode for a long time, and in our sector people can vote with their feet and break a lease with two months’ notice. 

“They are probably looking at this and thinking, I’ve spent a long time in my apartment, am I happy living in the apartment I have, with the public realm I have, with the service I get and in the community with the friends I’ve got?”

More generally, Altman said the pandemic and the lockdown it necessitated would spur people to favour larger units, rather than the micro-units or co-living schemes that had been getting more popular in some cities. 

“At Cortland, a trend we’ve been investing in is based around the size of the unit,” he said. “With smaller units you tend to have higher turnover and more stress on the operational side. People like stuff and acquire stuff, and all of a sudden if they are bursting out of their unit, they will choose their stuff over their great landlord, so we’ve always leaned in to big floorplates, more space and more storage space to try and deliver a housing unit our customers can live in over time for a few years in a row.”

He believes shelter-in-place orders and increased frequency of working from home will exacerbate that trend as having room for a desk or full home office can set a unit apart.

Altman also predicts changes in the kind of amenities that will be provided by owners and developers, certainly in the immediate term. He pointed to one scheme with a large, fancy communal dining room where residents could hold a party and be cooked for and waited on. It has been split into 11 separate home-working stations that are getting far more use right now than the dining room, he said. 

The way units are being leased is changing, too. Altman said that at one of Cortland’s schemes in the U.S., 22 out of 25 new leases signed had been undertaken using virtual tours. Such tours, or self-guided tours where potential residents just look around units with the aid of their phones, are here to stay, he and de Blaby agreed.

Speaking to Murray’s point about being a responsible landlord, de Blaby gave an example of how Get Living had been trying to help its residents during the lockdown, which seemed to be well received. 

“At the start of the lockdown, we said, if you’re self-isolating, let us know so we can bring your food or take away your rubbish. Once we were in to lockdown, we asked our staff to put in a call to residents for no other reason than to say, hi, how are you, is there anything we can do? 

“We’ve made 1,700 calls in that process. We should do it anyway, but our Net Promoter score and our Google review score went through the roof as a result of that. And we learned a whole lot of stuff about what people were worried about, what they were feeling, a whole load of stuff. It was a very positive and insightful thing to do, and it energised our staff too, as it felt purposeful.”

Now is a time when all of the promises made by BTR — better management, more customer loyalty, more resilient income — are being rigorously tested. So far, the test is being passed.