Land Acquisition In The Private Rented Sector
October 12, 2014
Rising house prices, demographic change and the tight mortgage market have led to a doubling in the number of renters in the UK over the last decade.
While no one doubts the UK’s penchant for ownership is about to change any time soon, there’s a huge opportunity in unlocking the kind of institution-backed sector that supports housing in the US. Replacing the reputation for poor standards underpinning the buy-to-let sector could, however, redefine the way the public approaches renting, while creating an exciting new asset class for institutional and, eventually, retail investors.
A growing number of large investors have been posturing on the sidelines for years and, over recent months, the talk has turned to action with major schemes in development across London and Manchester.
One of the much-discussed barriers that has delayed the entry of UK institutions into the market has been the lack of available stock and the relatively low yields available from buying an ‘off-the-shelf’ product. This invariably means paying a mark-up to a developer that comes straight off your returns.
Traditionally, institutions – who are typically focused on income – could pick up shopping centres or offices and gain double-digit returns in a boom market. But the good old days of 20 year leases are behind us, and this has driven investors on both sides of the Atlantic to embrace alternative sectors, where future income uplifts can be secured by new drivers of demographic demand, which are often less volatile than that in the banking or retail sectors.
In short, in a recession people will buy fewer products in shopping centres, pushing down retail rents – but those same people will always need somewhere to live. This is something America has been doing for decades, with the UK failing to catch up. However the tide has now turned and we, together with our backers M3 Capital Partners, are well on track to meet our target of delivering 5,000 private rental homes across London.
However, careful selection and acquisition of sites is still fundamental for successful Private Rented Sector (PRS) development; location remains key.
For drive-to sites – such as self-storage or out of town retail – the restrictions around location are far less tight than with residential property. While people are able to drive a moderate distance to buy their electrical goods, renters particularly prioritise convenience over all else.
When we talk about ‘rewriting the rules of renting’, what we mean by this is offering a product designed for time-poor urban dwellers who want to avoid the traditional issues associated with renting. They want to use their spare time productively, socialize with friends and enjoy where they live. Being close to transport links is a crucial part of this – and it’s this that’s driven our land acquisition strategy.
From our development in Maidenhead – which will be at (what was) the western end of Crossrail – to Archway and Swiss Cottage in North London, Helix and Three Colts Lane in East London, and other projects in Croydon and Greenwich, we’ve focused on targeting areas that have pent up demand for housing, but also boast superb connectivity.
But just as there’s skill in land assembly, there’s also a skill in capitalising on the value of a site, not just through convenience and external design, but also through maximising tenant enjoyment and loyalty. Recognising that the way people live is changing; we have developed brand pillars set around the provision of tenant services and communal space.
In the US, the hugely successful multi-family housing sector model, which accounts for 30% of accommodation, lives by the simple rule that ‘service is king’ in finding and retaining tenants – and subsequently maximizing returns. In the UK it can only be likened to the hospitality sector, with a concierge, on-site maintenance and responsive apps to support how people interact with the business.
Our own vision is to create a brand recognized for quality, and communal areas and service are an integral part of this. Where a conventional block of apartments would have a penthouse, we’re building a common lounge to be shared by residents. Similarly, we’re building gyms, meeting rooms, business areas, quiet corners and outdoor roof gardens/decks. Excellent service and amenities will contribute to future rental uplifts and reduced tenant churn.
But building in this extra space, and improving the durability of developments – to reduce future maintenance, and to make a quality product where people will want to live for decades to come – increases upfront development costs.
This means going toe-to-toe with traditional housebuilders who boast a wholly different business model to ours is tough. And this has certainly been another factor in keeping people from the market place who, if everything was equal in the land market, may have come to the table with developments. The ability of PRS developers – who focus on generating returns over the lifecycle of the development, not through an immediate sales process – to compete is often restricted by the soaring price of land.
This has led to us being more entrepreneurial, taking on sites without planning. We’ve been fortunate to have backers who understand this need – but this is an aspect of development that many UK institutions are not prepared to take on. By taking on a site pre-planning the potential upside from the value created can then be realized in the returns yielded over time. And this is a vital part of our business – alongside amenity spaces and services that will make our developments attractive to tenants.
For those unwilling to take sites pre-planning, the model will be difficult, but there is a growing body of support at various levels of government to encourage more institutionally backed development – in recognition of the part it has to play in solving the housing crisis, and in providing a much needed new housing tenure.
Admittedly, local planning guidelines still need to be stronger, and local authority financial viability models need to reflect the fact that building for long-term rent is not the same as traditional housebuilding. In return, PRS developers can agree rental covenants guaranteeing that such properties will be rented out for a minimum term and provide families with the security that comes from long-term tenancy agreements.
The Mayor of London, and a growing number of councils, support these ideas already – if we get it right it would create thousands of new homes with real long-term owners.
I’ve had the pleasure of working with some of the industry’s finest and this certainly amplified the intuition that we have for a good opportunity. Ultimately though, it’s about having a very clear sense of brand direction; knowing what your customers will want ultimately drives where you need to be positioned.
If you’re in the business of buying land to trade then the end user matters not, but as a brand seeking to manage rental homes over the long term, we’re focused on the full lifecycle.