With Build to Rent the private rented sector’s fastest-growing marketplace, and a major consideration for an increasing number of institutional investors and developers, Property Investor Today checks in with a market expert to get his take on this fast-growing trend.
Jonathan Gains was a director of national real estate business LIV Group from its formation and helped to create a new operating model for Build to Rent (BTR), including the development of a proprietary mobile app platform to deliver resident services.
In 2019, he founded ResiGains, a consultancy specialising in BTR management operations, and now works for a range of leading clients in the BTR sector supporting the evolution of next generation operator models and technology solutions.
Gains first experienced life in a multifamily apartment community in Greater Boston in 2003 and remains a frequent visitor to the American Midwest, where he periodically visits multifamily developments. We asked him for his reflections on the UK and US models.
Having lived in a multifamily development in Boston, USA, and been involved with Build to Rent developments in the UK – what are the main differences between the two models? Are there any similarities?
Build to Rent as we currently recognise it in the UK looks like one market segment of the US multifamily model, the high-rise downtown trophy building. By unit type, however, there are probably more low-rise suburban apartment communities in the US multifamily market, not yet a common feature of the UK market.
Most US multifamily rental buildings and most UK BTR schemes will likely offer on-site staff, resident common areas and amenities, and a business model that places the resident at the centre of service delivery as the customer.
Superficially, it’s easy to note the differences in the resident amenities on offer. Most American properties boast an outdoor pool, even if it’s on the roof of a downtown block, while others offer less common features such as a climate-controlled wine tasting room or a dedicated lift for pets to ferry them to the rooftop doggie walking track.
Does this kind of investment pay off on the bottom line? Hard to say, but as a former multifamily resident I would observe that most people like to brag about their amenities, though far fewer actively use them.
Below the surface, a much bigger difference is at a market level. BTR is still in its infancy and only a small part of the private rented sector, but the US multifamily market is mature and highly established.
There are some huge corporate operators with deep resources and strong management teams operating a far more proven commercial model. Avalon Communities, for example, has a market cap of $28 billion with a portfolio of over 85,000 units, enough to house the population of Bedford. So pretty much wherever you go as a renter, there will be wide market choice and competition for your business which drives up the quality and consistency of customer service delivery.
The BTR sector here is still working out how best to deliver the highest standards of service to residents while ensuring that every square foot of the asset pays its way and delivers to investors. We don’t yet have a fully resolved management delivery model, technology platforms are not yet joined up, and there is frequently a disconnect between frontline staff and back office support systems.
These broken links in the chain mean customer expectations raised in marketing are not always met and residents hold the power through social media to punish brands when this becomes entrenched.
Will we find the answers by studying the US model more closely? There are certainly learnings to be gleaned but transposing American solutions directly into our different market, commercial and cultural norms rarely brings success.
We need time to develop our own sustainable model for the UK, one in which residents get a first-rate service, owners get a healthy return on their investment, and operators can grow and thrive by providing relevant management services to all.
Is there anything the BTR model can learn from the US multifamily model, which has been established for much longer?
BTR is doing many things right, but there are definitely things that can be taken from the US.
While everyone talks up a desire to offer great customer service in buildings, on-site roles in the UK generally hold less responsibility than in the US, with poor access to technology and limited prospects for career progression.
American operators ask more from their frontline staff and place more responsibility on them for the day-to-day performance of the asset. Equally, though, building employees are supported with better training, good financial incentives and meaningful opportunities for career progression and development.
From a customer viewpoint, multifamily providers compete for rental customers with a wide armoury of incentives and promotions to reflect the relative strength of their product in the local area.
Online listings and roadside signage will often encourage readers to “Ask us about our Monthly Specials”. As the UK market becomes increasingly competitive, management operators here will have to work smarter to maintain occupancy and hit rental projections, while asset owners will have to grant operators more flexibility to price dynamically and do smart deals.
In a well-run US multifamily community, maintenance response times are often provided on a same day or next day basis. Most buildings employ a maintenance person on-site who will be trained to take care of practically any standard requirement.
Appliances are modular and defective units are swapped out directly from stores held on-site. On-site technicians are properly trained and able to fix everything from bathroom fittings to door locks, so it is unusual to have an external contractor come into any letting unit to conduct work.
With this capability, multifamily operators can offer residents a guaranteed maintenance response time with rent compensation if timescales aren’t met. Things go wrong everywhere, but to American thinking, if you pay for a service you should expect that service to be delivered as promised or you should be compensated financially, and the rental market also works in this more straightforward way.
As a contrast, in UK BTR, I have seen beautiful light fittings in apartments specified by the architect and imported directly from Italy. Great for that distinctive interior designer look, but not so great when they fail and the management operator is telling the resident there is a six week backorder to get spare parts delivered to the UK.
I just don’t see large American operators installing anything they can’t fix easily or source locally at short notice.
One of the main criticisms of the UK model is its high price points – will it have to evolve to become more affordable?
Definitely, yes. There's a huge choice of multifamily options in all segments of the market in most US cities ranging from high-end downtown towers to low-rise landscaped communities in the suburbs. There's far more choice in the middle market, especially outside of the priciest city centre locations.
Lower land prices, quicker construction methods and easier planning approvals for residential development mean that markets can expand quickly when demand rises, and this helps to keep the heat out of rising rental prices.
Renting is a normal housing choice for many Americans who have a long history of upping sticks and moving where the opportunities are. Indeed, the phrase “multifamily” probably reflects that you are likely to be living alongside kids, dogs and grandparents in most rental communities across America outside of the downtown areas.
Will entirely tech-led BTR developments be the norm in the future? Or do people prefer property managers and concierge services to be on hand?
I have a split view on this. On the one hand, I believe that technology will play an ever-more central role in BTR developments in future, as it does in every other aspect of our lives.
On the other hand, having recently visited a high-end US building with no on-site staff, I felt the building was soulless and lacked the warmth of a human greeting. I think that on-site staff should continue to play an important role, although this role is changing and will focus increasingly on customer engagement and curating events, as well as resolving problems on-site with better access to integrated IT systems.
My own view is that entirely tech-led developments will not be the winning commercial model as the market evolves.
What percentage of the PRS will BTR hold in a decade’s time?
Savills predict that the potential market size for BTR at maturity could be around £550 billion of assets and comprise around 1.7 million households. The rationale is that the total value of existing rental stock in the UK is around £1.5 trillion and the BTR proportion of this market will rise from approximately 1% at present to around 35% at maturity.
They base this growth potential on historic patterns in the rise of students now living in purpose-built managed accommodation.
Savills also point to research showing over 120,000 buy-to-let mortgages have been redeemed over the past two years as smaller buy-to-let landlords leave the market, creating space for growth in BTR. They draw some parallels with the US market over the past 12 years, where institutional and professional investment in rental stock has risen and now accounts for 47% of the market.
Does BTR offer any opportunities to the individual investor, or is it solely to the benefit of institutional investors?
BTR means a single owner operating all units in the building, so it’s difficult to see how the individual investor can participate in this business model, other than indirectly through collective investment funds that target this sector.
Aside from funds, the closest proxy is probably the Property Investment Club model where individual investors buy units in a building that is collectively leased and managed for rental on behalf of all owners. Unfortunately, this sector has something of a murky past where high returns were promised but not met, which left some small investors unable to service buy-to-let mortgages from rental yields.
Perhaps better providers coming into this space in future would a good way for small investors to compete and benefit from the growth of the BTR model.
Individual buy-to-let investors in apartment buildings may find that rent levels and competitiveness start to become eroded by strong local competition from BTR. This may bring pressure for new service models from within the traditional market that more closely align with the rising service standard expectations that BTR will fuel over time.
However, with BTR still accounting for such a small percentage of the UK’s demand for rental housing, there are still many more years of opportunity for smaller investors in traditional private rental sector properties.