BTR is still in the Hands of a Relatively Small number of Developers

My BTR Briefing with The NRLA’s Ben Beadle and Tessa Shepperson of

Landlord Law Services Ltd

Build to rent has been around since 2010

Photo: Adam Winger

Early adopters were companies like Fizzy Living and Delancey & Qatari Diar with their acquisition of the East Village. I was asked the question that many outside the industry ask:

Why hasn’t BTR taken off?

Not an easy one to answer simply. But, as we know, bringing forward large scale developments, particularly in urban areas, potentially linked with wider regeneration is not something that has a short time frame. it also took a while for investors to become comfortable with the asset class. While many did, L&G, M&G, Invesco and Aberdeen Standard for instance, the pace has been marginally above glacial. Having said that, glaciers, once on the move, are an unstoppable force that change the landscape forever. We also know that BTR, potentially, was seen as carrying considerable reputational risk to institutional investors. 

What are the blockers in getting BTR schemes out of the Ground? 

BTR still forms only a very small part of The Private Rented Sector. roughly 3%. Institutional investors traditionally focused on commercial real estate. Initially, they viewed BTR as being a bit messy and hard to manage. After all, in a residential block, there are myriad tenants, each with their own preferences and issues. Whereas corporate investment into offices, sheds or retail means that any disagreements are strictly commercial and of little interest to the general public. But with residential tenants, and potentially thousands of them there was always the possibility of a spat with just one of those going viral.

 Scale and deployment of significant capital is not easy to achieve, and the focus was on dense urban areas. Particularly London and Manchester. Opportunities to develop quickly are few and far between with long lead-in times from identification, to viability, planning and ultimately construction. It may take up to 7 years to get 400 or so flats to grace the skyline of any city. There are circa 54,000 operational BTR homes in the UK right now. With a further 90,000 and 37,0000 currently in planning and construction respectively.

Is scepticism around BTR still a concern?

This is more so in the world of renters (who are still largely unaware of the sector) than it is in the real estate investment world where it is quickly moving on from being an ‘alternative’ to a ‘mainstream’ asset class in its own right. Although some fund managers may still think that buying into logistics or offices is still the way to go, residential is definitely a viable and increasingly attractive asset class. A good example of potential change comes from US company BlackRock who are now also investing in social rented assets as well, and unsurprisingly so. BTR, as an income-producing asset class, has demonstrated robustness, has ridden the pandemic well and delivered consistent and reliable returns. BTR has largely outperformed other real-estate asset classes during this Covid period.

If you look at occupancy rates, While they have slipped from an optimal 97-98% in pre-pandemic times to around 85-90%, given the flight from urban areas, it’s held up well. 

Historically, asset managers would have looked to de-risk their investments with Blue-Chip tenants in their portfolios.

For example, Boots, John Lewis or a global legal firm like DLA Piper. However, it is clear that in BTR, the residents are Blue-Chip tenants. Principally because people prioritise the security of their home. In terms of BTR, we have thousands of blue-chip tenants. It just requires a change in mindset.

Does the experience of BTR tenants differ compared to ordinary PRS?

Photo: Ben Hanoka

What’s in it for the renter when it comes to living in a BTR property? One of the basic tenets emanates from organisations like The Urban Land Institute. They were principal in driving the thinking around renting and highlighting how it wasn’t working and also how it might work better. What they knew is that the experience of renting itself could be so much better. At Howsy, for example, within our DNA is the question regarding how we can reduce friction from the whole process starting with looking for a property, then making an offer and finally moving in. But we understand the experience does not end there. After the move in, it’s about tenant engagement and the experience within the property that is now a home.

BTR drove the tenant experience conversation in the beginning. 

 They were the first sector not to have deposits. They also understood that pets were important. They were also driven by the need to ensure residents thought of the place as their home and were extremely responsive as property managers. Also, the question of security of tenure is much improved. There are very few circumstances for issuing section 21 notice and therefore the management of tenants is very different. Now we see evictions only happening on a fault-based premise based on rent arrears or anti-social behaviour rather than a landlord selling up or moving back in themselves.

How are residents managed in different ways especially under a circumstance such as COVID?

Photo: Nick Fewings

The real difference is very much about a customer relationship and customer experience. Let’s face it, we all expect something more from every retail experience and we certainly want an enjoyable one whether we are buying a burger, clothes or renting a home. I know that very many of the people in property management are from the hospitality sector who are experienced in delighting customers and exceeding their expectations. They make every effort to go over and above to give a superb CX. During the severe lockdown in 2020, management teams reached out to residents digitally helping them with mindfulness, ensuring their welfare, managing and devising online events. You could say that the modus operandi is for people to feel happier than they might be if they were living elsewhere.

Do BTR developments have an easier time than PRS landlords?

 There are economies of scale in larger developments that make life easier for landlords and also tenants. As one example, large scale landlords may have their own onsite maintenance and repair teams because it’s financially viable. BTR tends to have boots on the ground to solve issues as they arise. There might be a concierge or as at Fizzy Living, a ‘Bob’. Whereas asset management in the PRS is usually the responsibility of the landlord themselves. They need to organise repairs and ensure they are compliant.

Landlords can learn from BTR but there are also reverse learnings

Firstly, let me stress, there is space for both. The agility of private landlords is immense but there are key things for smaller landlords to take to heart:

1. It might be your asset but someone else’s home

2. Customer service and responsiveness relating and engaging with the tenant.

BTR can learn regarding the agility of PRS landlords and also there is a lot of learning and data from the PRS as we must remember that it represents 97% of the market. In fact, there are 4.4 million rented homes in England and through this data, we can all understand what and who we are as a rented sector. The biggest thing of course is that property may well be an asset, but it is also a tenant’s home. For me, that’s the most significant shift in perception for many. 

Invest in the tenant and see the difference emerge

Photo: Afif Kusuma

 Individual PRS landlords can also bring baggage into the sector. They may be letting a property that they’ve lived in or inherited. They may be letting it out temporarily whilst they most elsewhere or until they give it to their children and so wish to take it back at some point in the near or distant future. 

 It’s that difference that represents the biggest divide. Particularly in relation to security of tenure. However, everyone in the property sector, however, small needs to adopt a business mindset. This is fundamental as BTR invests in the tenant themselves. Their tenant is key to the income stream and keeping happy tenants for the long term is very important. 

Landlords must take their responsibilities seriously

They should treat tenants with absolute respect. If they can’t, quite simply they should not be a landlord. The stories that make headlines about slum landlords and nightmare tenants are very much in the minority. But of course, these stories are always amplified beyond their number. On the whole, I’ve found most people are pretty reasonable. Landlords want a reliable income stream and an appreciating asset and tenants want quiet enjoyment, security and a place they can call home.