Freakonomics Comes To Build To Rent: Quintain Ran An Economic Experiment At Its Wembley Scheme

Ever since "Freakonomics" became a publishing hit, controlled experiments have become a much bigger part of economics. Results and findings generated through observing real life carry much more weight than those drawn from even the most elegant theory.

The trouble is, it is difficult in the real world to conduct the kind of randomised controlled tests that generate worthwhile results. But at its Wembley Park scheme, Quintain has attempted just that.

The thesis behind the growth of the U.K. build-to-rent sector is that the growing population of people who cannot afford to buy a house would prefer to rent from a professional, institutional landlord than in the existing buy-to-let system.

But is that true, and will people pay a premium for professionally managed apartments? In order to find out, Quintain leased apartments at Wembley through its Tipi management brand, and also through individual landlords, to see if there was a difference in the price people were willing to pay for the same apartment.

“Here at Wembley Park we have been able to run a direct comparison,” Quintain Chief Executive Angus Dodd told delegates at Bisnow’s Build To Rent Annual Conference at Wembley Park. “We have been letting flats on behalf of private buy-to-let investors and also flats through Tipi. It is a proper, controlled experiment.”

The results bode well for those investing in the sector.

“It is evident to us that consumers are absolutely prepared to pay a 10-15% premium for the Tipi offer,” Dodd said.

But in his opening keynote speech Dodd addressed what he said were some of the fallacies about the sector.

First he questioned the idea that build-to-rent schemes are guaranteed to provide secure, long-term and inflation-linked income.

“The income will only be secure if occupation is maintained,” he said. “So the quality of the customer experience is paramount. As the industry expands, so operators will face more competition. Those operators who don’t nail the customer experience every day, every year, in every building, will not run assets with secure income streams.”

He said that given household incomes are being squeezed by price inflation rising faster than wage inflation, landlords can not push rents too hard.

He added that the common conception that "gross-to-net leakage" amounts to about 25% is not applicable in all cases. This difference between gross and net income created by the cost of building and running schemes could only be reduced if operators have genuine scale, and this would mean smaller operators would find it difficult to make a profit in the sector.

“Here at Wembley Park we will benefit from economies of both scale and place," Dodd said. Wembley Park will have at least 5,000 build-to-rent units, and has total consent for 7,500 homes.

"But we don’t think we will hit 25% or below until we have delivered 2,500 homes. There’s no doubt in my mind that a small number of dominant players will emerge in the U.K. — those that have access to the pipeline of product and those who have focussed on and invested in the systems, operations and people to run streamlined and efficient businesses. I am highly sceptical that geographically fragmented small scale BTR operators will flourish in the long run.”