The REalyst speaks to Colliers’ Associate Director, Gunnar Larsson, about the rapid and sustained growth of the Build-To-Rent (BTR) sector. We’re keen to find out what Gunnar thinks the future holds for this dynamic part of a quickly changing rental market.
Read time: 10 minutes
1) You helped to setup Colliers BtR/PRS Investment wing in 2015 – how have the opportunities for developers changed in that time?
Yes, that’s correct. I helped to establish the investment side of BTR for Colliers in 2015, alongside Toby Nicholson.
From the developer side we are now seeing a much wider spread of sources of capital looking to invest in the BTR sector. There has been an increase in interest of global investment in the UK in these schemes because it is a stable market here. With significant potential for growth, the market in the UK also carries less risk for developers than the more traditional Build-To-Sell model. Forward-funding developers can therefore secure their exit strategy much earlier, and essentially have a near-guaranteed return on investment before they embark on the building work on a project, which is obviously attractive.
I think BTR is also starting to become more flexible as a model. In the early days you would typically see blocks of a minimum of 120-150 properties, usually in London or Manchester. But it has grown across the UK, since we now understand that BTR can work on a smaller scale, for houses and apartments or as part of a mixed use build.
2) Does being part of such a massive business like Colliers – with so many different aspects of the market covered – help you gain a better insight into the whole picture when it comes to the shift towards BtR?
Internal networking has become a crucial part of delivering a good service. Having so many different parts of industry covered by different departments within Colliers is a huge asset for us. I think our clients also appreciate a joined-up approach to business whereby we can filter relevant information from across our consultancy teams, which plays a critical part in our clients’ own successes.
Colliers is a big company, so we also have tools in order to ensure our service is to the highest standard. For example, we use Sales Force to stay on top of client engagement, nationally and internationally, and keep all the relevant teams associated with that client connected appropriately. It makes us well placed in a growing market like BTR to see potential areas for growth.
3) What do you think the potential market size for BtR is and why? Is the current rate of growth sustainable in your opinion?
Although it has been growing consistently since we setup a dedicated BTR team, at this stage it is hard to say yet where the limit is for the market. As far as the whole UK market is concerned, it is still a relatively small proportion of the mix.
Where I am from, over in Sweden, the BTR market is very established (although it works slightly differently, with rent regulations amongst other factors) attracting a large proportion of the institutional investments. The Swedish BTR market is second only to commercial offices, both as developments and income producing schemes and portfolios. Whereas in the UK, the BTR market is an investment stream that has so far been virtually untapped. Once it starts opening up, and more BTR schemes reach successful completion, then we could see investment schemes and portfolios trading on significantly higher volumes.
I also think that there is a unique mental attitude in the UK concerning buying behaviour when it comes to property. The old saying ‘An Englishman’s home is his castle’ still rings true for a lot of people, who think buying is the only rational long term option. In the UK, there is a stigma attached to renting, as if it is an indicator of a lack of success, which you do not find at all in countries such as Sweden or Germany. If that starts to change, expect to see significant growth in the BTR space.
4) What do you think is the long term solution for the rental generation?
I believe that the BTR market is a long-term solution for many different people. In the last five years, consumers are all moving towards subscription or leasing models and away from investing in a single asset in which to tie up all their personal capital. This is happening across many industries.
I expect BTR will be no different in the real estate market. It allows residents to keep their cash reserves and invest their income in different ways, rather than tying their capital up in bricks and mortar. In a few years, it could be far more common for would-be buyers to use that cash reserve for personal business development or buying and trading stocks and shares, while property becomes a fixed monthly cost.
The BTR market can also be scaled. Currently, there are developments that are creating a variety of properties in size and types, in anticipation that buyers will move up from smaller, more cost effective BTR spaces to larger properties in the same community as the market matures.
Notably, the BTR market started by targeting young professionals and foreign students studying in the UK. That is to say, its target market was anyone who will not necessarily be able to stay in the same place for 5-10 years, whereby BTR is the perfect solution. This target market comprise people who place real value in the kind of amenities that certain premium BTR builds can offer: a concierge, a gym, common dining areas or shared rooftop space. By offering these services, a landlord can charge a premium, knowing they attract tenants with higher incomes.
Still, the sector can only sustain growth by also attracting a wider range of tenants, downsizers, empty-nesters and retirees. Anyone who wants to gravitate towards a premium, professional rental service.
5) With substantial local variations in rental yields by post-code, how does a developer ensure a new project will be a profitable success?
The biggest point is about having reliable, trustworthy landlords, who respect, listen to and take care of their tenants. These landlords will ensure that tenants and renters have their concerns met and quickly resolved. Basically, we’re talking about the polar opposite of rogue landlords.
In some ways, the emergence of the BTR market can be seen as a reaction to the relatively poorly regulated private rental sector in the UK. If we say that the average premium (to a tenant) for a BTR property versus traditional stock is around 9-10 per cent, then that does ultimately limit where a developer can choose to put a new project. It is for this reason that so many of the pioneering BTR developments started in London and other urban centres. If you can be close to the right postcode, the right transport links, as well as offering a good range of amenities, then it is not hard to justify that premium to a tenant.
Colliers recently researched the demographics groups of renters in order to determine which group is the most demanding (or sensitive) when it comes to onsite amenities. We are still in the early stages of advising developers on whether these are an ‘essential’ part of attracting the right audience or not. However, these sites vary considerably, so at the moment we are approaching it on a case-by-case basis. There is no hard-and-fast rule that will work anywhere, but the management of the tenants’ needs by the landlord and delivering a smooth service has to be first priority.
6) Are there any guarantees in BtR? Is there any more risk than in more traditional residential developments? Or is density the answer to that?
Actually, it is quite the opposite – for developers and investors at least. The surge in worldwide investment and rapid increase in development of BTR projects is mainly because developers can secure their exit strategies much earlier. That is especially true with forward-funded projects, as developers can look to establish a zero negative equity deal. This ensures that they do not need to sink capital into the land acquisition or construction and assume that risk and lose liquidity, since that money has already been secured beforehand. It is a brilliant way to get new-builds off the ground in the face of rising construction costs across the industry. It also seems that local authorities are really positive towards these developments, which helps avoid stagnation in the planning process.
As long as a BTR build is well managed afterwards, we are seeing that it is not always necessary to have the most desirable post code or area. That trust can build loyalty too, so while most BtR or PRS properties are offered with a 12-month contract, which is what tenants are used to and comfortable with, you see landlords starting to offer between three and five year tenancies, but with earlier break clauses for both parties, a mixture of security and flexibility that a lot of renters in built up areas can struggle to find with private landlords. Still, the turnover of tenants that we’ve seen so far (the median term of tenancy) is still 12 months. Time on market and yield does still vary from one project to another, but we do use REalyse to do our research on proposed sites to understand average time on market.
7) Finally, are there any significant challenges or road blocks that stand in the way of the BtR/PRS model continuing to go from strength-to-strength?
I think all the indicators really do show that the growth is sustainable, that this is something the market wants and needs, and a solution that works for everyone in the chain. The main potential barriers could be a political change, because there is a suggestion that new government could bring in rent controls and tighter regulations that would make the BtR model less profitable for investors and landlords. However, I think if you look at other countries, which already have much stricter controls in place, there is still a healthy market for profitable BtR schemes, so I have a lot of faith that no matter what happens. the market is robust enough to sustain itself and continue to grow.
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Gunnar Larsson (MRICS) is Associate Director at Colliers International, focusing on Residential Investments and Build to Rent as part of the Residential team in London. Primarily his focus is on Forward Funding deals of developments over 100 units, and he has been specializing in Build to Rent on the agency side since end of 2014. Previously worked at JLL, and also on commercial developments in the Nordics, including his native Sweden
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