We speak to Colliers Associate Director Gunnar Larsson, discussing the rapid and sustained growth of the Build-to-Rent sector, and what the future holds for this dynamic part of a quickly changing rental market
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 Build to Rent for Colliers in 2015, alongside Toby Nicholson. I think from the developer side now we are seeing a much wider spread of sources of capital looking to invest in Build-to-Rent. There has been an increase in interest of global investment in the UK in these schemes because it’s a stable market here, with a huge potential for growth, and it also carries less risk for developers than the more traditional build to sell model. With forward funding developers can secure their exit strategy much earlier, and essentially have an almost 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, big urban centres, but now we understand that BtR can work on a smaller scale, for houses and apartments or as part of a mixed use build - and it’s spreading over the UK.
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 very crucial part of delivering a good service. Having so many different parts of industry covered is a huge asset for us, it has to be. I think our clients also appreciate a joined up business that is switched on to every piece of information which might be relevant to them, who can do the extra work to speak to other teams, our land team, investment and consultancy teams and so on, to spot those areas where you can find further success for them [the client]. We are a big company, so we also have tools that we use to make sure this happens as much as possible, for example we use Sales Force to stay on top of client engagement, nationally and internationally, and make sure to communicate with other teams where appropriate - 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 team, at this stage it’s hard to say yet where the limit is for BtR. As far as the whole UK market is concerned, it’s 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 etc.) attracting a large proportion of the institutional investments, second only to offices, both as developments and income producing schemes and portfolios. Whereas in the UK, that’s an investment stream that’s so far virtually untapped - once it starts opening up, and more and more schemes reach successful completion, then we could see BtR schemes and portfolios trading on significantly higher volumes. I also think that there is a unique mental attitude in the UK concerning buying behavior 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, and there is a stigma attached to renting, as if it’s an indicator of a lack of success, which you don’t find in at all in countries such as Sweden or Germany. If that starts to chance, we’ll see even bigger growth.
4) What do you think is the long term solution for the rental generation?
Honestly, I think BtR is, and can be, a long term solution for many different people. In the last five years, if you look at different industries, especially the automotive industry for example, even to streaming services like Netflix and Spotify, consumers are all moving towards a subscription or leasing model, and away from investing in a single asset in which to tie up all their personal capital. BtR is no different. It allows them to keep their cash reserves and invest in different ways - rather than tying it all up in bricks and mortar. So in a few years, it could be far more common for buyers to use that cash reserve for personal business development, or buying and trading stocks or shares, while property becomes a fixed monthly cost. It can also be scaled, there are developments that are creating differently sized properties and anticipating that buyers will move up from smaller, more cost effective BtR spaces to larger ones in the same community as they age.
However, it won’t become the solution for everyone. With some couples at a certain level of combined income for example, they’ll always gravitate towards buying outright, particularly in certain desirable areas. Build to Rent started as targeting young professionals, foreign students studying in the UK, anyone who will not necessarily be able to stay in the same place for 5-10 years, and for them BtR is the perfect solution - these are also the kind of people who place real value in the kind of amenities that certain premium BtR builds can offer, like a concierge, gym, common dining areas or shared rooftop space - the kind of services that a landlord can charge a premium for, knowing they attract higher income tenants. 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, who ensure that tenants and renters feel like they are listened to, their concerns are met and dealt with and that they trust to take care of them. Basically we’re talking about the polar opposite of rogue landlords - in some ways BtR can be seen as a reaction to the relatively poorly regulated private rental sector. 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. That’s why 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, and offer a good range of amenities, then it’s not hard to justify that premium to a tenant. We [Colliers] have done some recent research into the demographics of which groups of renters are most demanding, or sensitive when it comes to on-site amenities like the ones I mentioned - but we’re still in the early stages in terms of advising developers on whether these are an ‘essential’ part of attracting the right audience or not. But these sites vary hugely, so at the moment I’d say it’s on a case-by-case basis, there is no hard and fast rule that will work anywhere - but the management of the tenants and their needs by the landlord, 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’s 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 they [developers] can secure their exit strategies much earlier. That’s especially true with forward funded projects, as developers can look to establish a zero negative equity deal, so they don’t 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’s a brilliant way to get builds off the ground in the face of rising construction costs across the industry, and it seems that local authorities are really positive towards these developments, as well, which helps avoid stagnation in the planning process, which can be a real issue with other developments.
As long as a BtR build is well managed afterwards, builds trust with tenants and does the work in that area, we’re seeing that it’s 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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