What Does 2019 Have In Store For UK Build To Rent?

If the UK build to rent sector was a piece of software, it would currently be changing from version 1.0 to version 2.0. An initial first wave of developments is either up and running or near to completion, and a second, larger wave is in the pipeline.

So what are the lessons that have been learned from that first wave, and how is this influencing the developments of today and tomorrow? And what does 2019 hold in store for build to rent more generally, when it comes to such matters as sourcing investment opportunities and the impact of Brexit?

Here are five things that will define 2019 in the UK build-to-rent sector. Look out for more at Bisnow's Build To Rent Outlook & Expansion Event on 29 January.

This Is Not U.S. Multifamily We’re Talking About Here

There are more private rented sector apartments in Dallas than in the whole of the UK, so it is not surprising that the nascent UK sector looked to the U.S. for lessons.

But the next wave of UK developments will depart significantly from their transatlantic peers.

“The first companies active in the sector spent a lot of time travelling to the U.S. and looking at the best of breed there, so from that you got the current trend for very amenity-heavy schemes,” FirstPort Head of Business Development Martin King said.

“The market there is more mature, so developers are competing on amenity. But build to rent in the UK is not just about amenity, and if you load up on that then it costs more to design, build and manage. People here are a lot more concerned about security and convenience. So they might want a concierge, but it doesn’t have to be a hotel-level concierge.”

King said technology is allowing developers and managers to measure what tenants actually use in a scheme, revealing their actual preferences rather than what they say they want. For example, fingerprint technology on gym equipment shows what people actually use, so infrequently used machines can be taken out and more space given over to yoga or stretching space.

And if you know up front that maybe you don’t need a gym at all, or no one is going to use the cinema room, that offers the possibility of including more apartments.

UK Build To Rent Is Not Just For The Young

The tenant base of operational schemes has not solely been young professionals — they have attracted far more people in their 30s and 40s and retirees than was expected when the sector came into existence. As a result, developments have to change.

“Depending on the demographics of an area, you can improve the efficiency and appeal of your building,” King said. “It really is the full spectrum of people, and not just young professionals. It can influence the type of community you are looking to build, and change the balance of things like how many electric bike points you put in versus car parking spaces. If you know what audience you are targeting at the start of the process then there is less chance of getting the mix wrong."

Getting The Boring Stuff Right Is Crucial, Especially When It Comes To Energy

As innovation in construction and development advances, the way rented residential schemes are being built is also changing, and one of the key areas is in energy.

As recently as a few years ago, major apartment blocks might have been built with individual boilers in each apartment. But as energy efficiency is sought, building-wide or even district-wide heating and power schemes are becoming the norm.

This is great for energy efficiency and hence for the environment, but it can cause issues for BTR owners.

“Customers are becoming increasingly savvy about energy usage and efficiency,” Muse Developments Regional Director Mike Auger said. “They want transparency in terms of paying for what they actually use, but that is not simple with the move to communal systems.”

It is especially important that transparency is increased as the industry moves toward more of a “membership fee” model where all costs are combined into a single fee for tenants, Auger said.

Brexit Brings Funding Volatility

It is widely thought that Brexit will not have a huge impact on demand for build-to-rent accommodation, given the gap between supply and demand in London, South East England and big cities like Manchester and Birmingham.

But given the volatility it is creating in the value of the pound, it could affect financing costs for overseas investors or those using higher leverage, which will force them to look at different options.

“If you have a high cost of debt it means it is going to have a bigger impact on you,” Cortland Chief Investment Officer Andrew Screen said. “Net yields on UK BTR are around 4%, and if you are geared at 60-70% then your cost of debt can be 4-5%, so all of your income is going to service your debt. If you are exposed to interest rate fluctuations or you are highly geared then you are in a more difficult position.”

Screen said Cortland typically borrows in the long-term fixed-rate debt market, for 40 years or more, and volatility creates opportunities for the company and other long-term investors.

Housebuilders — A Growing Source Of Deals

The uncertainty around the impact of Brexit has caused prices in the London and South East housing markets to fall, and this has created a new source of deals, Screen said: housebuilders.

Housebuilders look for a development profit of 20% when selling units, and when things are good, they can be confident that in the two to three years between starting a scheme and completion, that prices will rise or remain stable and give them that profit.

What is more, in London in particular, in recent years they have been “derisking” large schemes by selling a large number of units off plan in Asia.

Now, with prices declining, housebuilders have no certainty on the price for which they can sell units in a few years, and the off-plan sales market has all but dried up. Housebuilders are thus increasingly offering large portions of developments to BTR buyers. They can only lock in a 10% profit, given the prices BTR investors will pay, but it still gives them some profit and allows them to reduce risk on big schemes.

“We are looking at schemes near major transport links that have a good location,” Screen said. “Housebuilders aren’t offering up whole developments, but they might look to find a BTR buyer for around a third or so.”

To hear about all these themes and more join Bisnow's Build To Rent Outlook & Expansion Event on 29 January.