The housing shortage in the United Kingdom has reached a crisis point, where homes to either buy or rent are not being built fast enough to keep up with demand. Immigration, natural population growth, complex planning rules, and limited land are adding tremendous pressures to the housing market. Homeownership—long held up as an ideal—is simply out of reach for many residents. More people are renting, out of both choice and necessity, but supplies of rental housing are limited and the quality and management of rental housing stock in the United Kingdom vary across the board.
The British government has called for 1 million new homes to be built by 2020, and has also called for innovative solutions to the problem from a variety of stakeholders, including members of ULI U.K.’s residential council, made up of the nation’s leading property developers, architects, investors, engineers, academics, and public sector leaders. The council recently released a second edition of its Build to Rent: A Best Practice Guide, the first edition of which was published in 2014 to an enthusiastic reception from public and private sector alike. Copies of both editions can be purchased on the ULI U.K. website.
The new version further explores how purpose-built rental housing—referred to as “build to rent”—as an emerging asset class is a potential solution to the current imbalances in the housing market. ULI Connect spoke with council chair Richard Meier, partner at Argent, about the new guide.
The report differentiates between PRS (private rented sector), a longstanding category in the U.K., and “build to rent,” a newer concept with an emphasis on customer service, projects that are at a much larger scale, backed by institutional investment. For audiences outside the U.K., can you describe the difference between PRS and build to rent and why it matters?
RM: The distinction between PRS and build to rent is critically important. Although the proportion of people who rent versus own is similar to the United States, almost all of the rental stock in UK is owned by small-scale, individual investors with “buy-to-let” mortgages. There is little consumer knowledge of what in the U.S. is known as multifamily housing. The private rented sector in the UK, because it is spread out among private, individual landlords, is a world of variable and inconsistent quality. Although there are many good, decent landlords out there, landlords and their agents in the UK as a whole don’t enjoy the best reputation. All to often, we hear of renters receiving a below-average service and having to pay excessive fees in a pressurized environment to secure somewhere to live. Landlords are often not particularly motivated to keep you as a tenant, nor are they always trained or experienced in managing property, so the customer experience can be rather disappointing.
The lesson from the U.S. multifamily sector is that it is possible to create something designed and managed specifically for rental customers. Investors and developers are motivated by maximizing their long-term net operating income, as that is what underpins the value of their asset. How do they attract the largest number of customers, retain them, and optimize their cost of operations? That is what is driving the value of their income stream. They are absolutely motivated to do anything and everything to achieve that end. The Build to Rent guide stresses the importance of creating a sense of community within a building, the provision of amenities, and hiring a team of people who will provide a level of service that encourages customers to stay.
The other difference is scale. While some small-scale landlords may want to provide a great level of amenity and service, the costs of it will be need passed on to the individual tenant. But when there are 200 homes within a building, the cost of providing that professional level of service and additional amenity can be diluted across all the homes, maintaining affordability for each customer and presenting better value for money.
The guide notes that there has been a 10 percent growth in the number of households renting in the U.K. What factors are driving the demand for rental housing—and how can the emerging build to rent sector meet it?
RM: In the wider UK, there is a significant imbalance between the supply of new homes versus of the demand, and this is particularly acute in London. There is a significant shortage particularly in the midmarket and affordable product, homes for the real people doing real jobs. Mortgage lending criteria have become tighter, and the level of deposit or down-payment required has increased. People are continuing to rent perhaps longer than they might have previously, and when they do come to buy the bar is raised further due to a shorter repayment term. It’s a vicious circle.
There is also cultural shift around people wanting to rent, reflecting the lifestyle of millennials and younger generations. People’s aspirations are shifting away from ownership to sharing resources. They may not necessarily want to own a home or a car and be tied down. Younger generations, particularly in urban areas like London, want greater flexibility to experience life, travel, or move overseas for a job opportunity. Rental product with flexible leases gives people the flexibility to be more mobile and live in places they not otherwise be able to.
Historically, there was always a high proportion of renters in the UK; in the 1920s only 20% of people owned a home. But since the 1950s a high premium has been placed on homeownership for a multitude of reasons. Now we see a reversal of that trend since fewer people seem to be able to afford purchasing a home and homeownership is not the universally shared aspiration it once was. The challenge for us now is that we have to try harder at offering people choice and a quality product to rent.
The UK residential council made trips to Washington, DC and Chicago to see how the multifamily sector works. What lessons did you take away and how did these study trips inform the report?
RM: It was in fact through some of the visits to the U.S. that inspired the UK Government PRS Taskforce to look at this emerging asset class and to work with ULI to prepare a guide. What does great look like for this asset class? Multifamily housing in US is a mature market; one of the lessons on the operational side is the high level of customer service. We visited a garden property on the outskirts of Washington, DC, where the onsite property manager welcomed a large delegation of us, but when a resident needed assistance, quickly shifted gears to focus on the resident’s needs–the manager was wired!
While there are some fantastic lessons from the U.S. framework, the guide makes it clear that the right product will be driven the local, target market in the UK. It’s not about carbon copying US multifamily. There will be subtle, but important cultural differences to take into account. The guide does not prescribe the ultimate product but instead offers a toolkit to achieve the appropriate investment grade product for the market it is targeting.
The guide also includes successful examples of built to rent properties in the UK that have come online, some of which were originally built as build to own projects. These properties are commanding premium rents, but are offering tremendous value for money. The build to rent sector is off to a very promising start, but there isn’t yet massive awareness among consumers about it as an asset class. Sort of like a plane that’s now taken off from the runway: great start, but a long climb ahead of it.
The guide recommends investing in shared common spaces and amenities, delivering a high level of customer service, and make residents feel as though they are renting the entire building, not simply their unit. Asset management is the key differentiator between Build to Rent and the broader category of PRS. Can you elaborate?
RM: Management is critical to the successful operation and long-term value growth of this asset class. Ultimately, value is driven by the attraction and retention of customers at optimum rental levels, combined with operating costs that are as efficient and streamlined as possible. It is important to a) ensure that we get the right team in place who can deliver a great service level to customers and b) ensure that the physical product is designed for long-term management from the outset. In the UK, there is not yet a mindset about designing for the long-term management of residential, rental product. The selection of robust products and life-cycle cost analysis need to move up the designer’s agenda.
Where are investors on the built to rent question? Is there a widespread knowledge or confidence in build to rent as an asset class, or will more data need to be generated in UK markets to make the case?
RM: There is significant appetite from the investment community. This began with international investors and UK investors have tended to follow. Having said this, there is more “appetite” than physical transactions taking place. One reason is lack of completed investment grade stock, and another is challenges around viability in certain locations. Some investors have moved right up the risk curve and into development themselves in a bid to address this. Transparency of data is important, too; at the moment it is very poor. A big focus is also on continuing to educate local authorities, where awareness of the product, how it can contribute to meet housing need and how it is different to the individual “buy-to-let” product, is still relatively modest.
Copies of both editions of Build to Rent: A Best Practice Guide can be purchased on the ULI U.K. website.