Inside John Lewis And Lloyds’ 20,000-Home BTR Push

Two of the companies with the biggest ambitions in the UK rented residential sector right now aren’t even property firms. 

Lloyds Banking Group, the massive high street lender, and John Lewis Partnership, the department store and supermarket chain, announced significant pushes into build-to-rent and single-family rental investment and development in the last couple of years.

Both have been gestating strategies that are now starting to come to fruition, and their senior executives gave the most detail yet about the how, when and why of their push into rented residential at Bisnow’s Build-To-Rent Annual Conference, held at Quintain’s Wembley Park BTR scheme.

The two companies have ambitions to build, buy and own at least 10,000 homes each over the next decade or so. To put that in context, doing so would make them the size of Grainger, one of the UK’s largest BTR owners, which operates just shy of that number of homes today. The investments are likely to total well over £5B. 

Both John Lewis and Lloyds were drawn to BTR by the appeal of diversifying beyond their core businesses into a sector that is related but not entirely correlated, and one they predict offers secure and stable income. 

“When we’re looking for partners, in our search, we’re making sure that we’re really aligned, especially when it comes to ESG,” John Lewis Partnership Head of BTR Katherine Russell told the audience of more than 400 at the event. 

John Lewis first floated a move into the BTR sector in 2020, and in summer 2021, formally unveiled plans to develop about 10,000 BTR homes over the course of 10 years. It announced the first three locations for developments on property it owns in summer 2022 — 1,000 homes being built above Waitrose supermarket stores in Bromley and Ealing in London and on the site of a vacant warehouse in Reading. 

The move into residential is part of the company’s plans to have 40% of its profits come from nonretail activities by 2030. 

Fund manager Abrdn will be the funding partner for the £500M first tranche of homes as John Lewis' first port of call when seeking partners for future developments, though it could bring in others, the company announced in December 2022. The company will not wait until the first tranche of homes has been completed before selecting its next portfolio of sites and a partner to develop them with, Russell said of a process that is ongoing.

Given the firm’s core business as a retailer, design plays a major part in its BTR offer, Russell said.

“There’s a proposition that everyone needs to offer, what we would call a standard proposition, and then we think, 'What is that 30% extra that John Lewis can do?'” she said. “We have a strong preference for biophilia in design. We want to bring the outside inside.”

Whether units have balconies would be taken on a scheme-by-scheme basis, she said, although as the pandemic has receded, they are a little bit less important for residents. The same is true of coworking space. 

“When it comes to [environmental, social, and corporate governance], that’s where the alignment is key,” she said. “Yes, the most sustainable developments cost a bit more, so we’re looking for partners where they believe that is important as well.”

Gyms are a necessary amenity because even if people don’t end up using them, they believe they will, and they have a wow factor, she added. 

It has not been plain sailing for the strategy so far. John Lewis has faced questions from local authorities in Ealing and Bromley about the height of the towers it plans to build.

Russell said the company aims to create schemes that align with its values and are additive to the areas in which it builds. 

“We design from the outside in to make sure we receive planning permission, but we also design from the inside out,” Russell said. “We don’t want to create gated communities. We want something that talks to local communities and provides what an area needs.”

About half of the 10,000 homes it aspires to build will be located on or above assets in its existing portfolio, with the other half coming from new sites, John Lewis said when it announced the BTR push. It is keeping an eye on the land market, hoping prices adjust as the investment market cools, Russell said. 

When Lloyds Banking Group announced that it was setting up Citra Living to invest in the rented residential sector in 2021, there was very little accompanying detail. At the time, it said it wanted to acquire 400 properties in its first year and to double that the year after.

At the BTRAC event, Citra Chief Operating Officer Craig Luttman filled in some of the details on how it has gone so far and where it is heading. 

Coming to the end of its second full year in existence, the division has about 500 homes under management, and it should have 500 more by the end of 2023, he said. The aim in 2024 and beyond is to pick up the pace and acquire or fund about 2,000 homes a year, with an ultimate initial target of about 10,000 homes. 

So far, the homes purchased have skewed toward single-family rentals, with deals struck to buy portfolios at existing housing developments from builders like Barratt, with whom it has formed a strategic partnership. Over time, the portfolio is likely to be balanced 50/50 between SFR and BTR, he said. 

Lloyds' strategic rationale for entering the sector is to hedge and supplement its existing mortgage business. It has 20% of the UK mortgage market and 16% of the buy-to-let mortgage book through its Birmingham Midshires subsidiary. But regulatory changes and interest rate rises are slowing the housing market and pushing small investors out of the buy-to-let market. Citra gives it the chance to replace some of the income that might be lost from its mortgage business.

“Our aim is to grow to scale and create income for Lloyds,” Luttman said. “The challenge for the sector is that you have 35,000 homes leaving the private rented sector each year and a pipeline of 15,000 new homes coming in. So how do we provide enough affordable homes?”

“Affordable” was a word Luttman mentioned several times. Citra is not operating in the officially designated affordable housing sector, but it is looking to buy and build homes where the rent is not more than 40% of the tenant’s overall income and to create affordable units that provide secure and consistent income streams. 

To emphasise how Citra is seen as operating in tandem with Lloyds’ mortgage business, Luttman said that it was rolling out a pilot rent-to-buy scheme in Chesterfield in the coming weeks, where residents can buy their homes in instalments over time, essentially a kind of shared ownership. If the pilot is successful, it will be rolled out across the Citra portfolio. 

“Part of the levelling up agenda is to get more people into home ownership,” he said. “There is a benefit to the wider Lloyds group, but there is also a wider societal benefit, too.”