Covid-19 is a generational event that will impact the way people live, work and behave long after the pandemic has been controlled and a vaccine produced.
But what will the impact be on the Build to Rent (BTR) sector? It seems there is no shortage of views on this and headlines vary wildly from day-to-day. We have not been here before and the pandemic is not yet over, so no-one really knows for sure.
However, there are some inevitabilities, some certainties and some historical precedent which, when taken together, can provide a roadmap of sorts for what to expect in the coming months.
Recession is inevitable. However, what kind of recession is less clear. ‘V’, ‘U’, ‘L’, ‘double dip’, ‘worst since The Great Depression’ - all are on the table but what path it takes will only be obvious with hindsight. The fact that the government has taken unprecedented action is irrefutable – however, the outcome of those measures is still to be determined as is, of course, the ultimate cost.
People will still need to rent. However, consumer behaviour will have changed dramatically with a shift in priorities affecting a likely change in requirements and mindset.
It is critical the sector recognises that and adapts accordingly.
What do we know right now?
Residents expect you to help.
With reports of large waiting lists for Universal Credit and housing payments, and people being laid off or facing some loss of income, it is inevitable that the number of people defaulting on their rent in the coming months will increase significantly.
In April, Property Week reported that collection rates were as low as 44% and Shelter has warned of an ‘onslaught’ of people unable to afford their rent. Shelter’s research outlines that 1.7 million believe they will lose their jobs in the next three months (the OBR are forecasting 2 million), that nearly one in four renters (24%) in England have already seen their incomes fall or lost their jobs and 23% say that losing their job will leave them unable to pay their rent immediately.
Whilst collection rates appear to be higher currently in BTR schemes, the full picture will only really be revealed in the coming months.
Talks of a rental strike do not appear likely to result in any collective action for the time being. Nevertheless, there is increasing evidence of disquiet among renters at the lack of direct support from the government, leading to an inevitable reliance on private support from landlords.
Stories of unsupportive landlords are thankfully matched by examples of those adopting a more understanding approach.
BTR operators have a real opportunity to demonstrate the very ethos the sector purports to be built upon; putting the customer first and communicating with residents in a highly empathetic way is key. Whilst policies will no doubt be in place for ‘normal times’, these are not they and the need to have a flexible case-by-case approach, offering payment plans, rent deferrals, discounts etc. will go a long way to enhancing both reputation and brand, and engendering loyalty from residents when they get back on their feet.
Pricing is key - and it will go down
For the first time in 12 months, London’s pace of rental growth has fallen behind the rest of the UK.
Although as much to do with affordability levels in London already being at a peak before Covid-19, it is unlikely now, with the impact on people's income, that this will go anywhere but down in the short-term.
In the period following the 2008-2009 financial crash, rents in London dropped by 9%.
Given that the UK’s BTR market, in its current form at least, didn’t exist in 2008, it is useful to look at what happened in the US Multifamily market. Here, professionally managed apartments reported rent declines in the range of -4% to -7.9%. In addition to this, occupancies also fell to their lowest point in a decade, dropping from over 96% to just over 92% occupancy.
Clearly, any direct comparison is limited as the economic impact of Covid-19 is expected to be far greater than any previous recession ever has been. However, we should take some comfort from the fact that, as markets go, the residential rental sector is one of the most defensible and robust.
Short to mid-term implications
We can reasonably expect the following factors to exert significant downwards pressure on rental pricing:
The collapse of the short-let market:
The short-let market has effectively imploded and as we can see from Rightmove’s data, (reporting a YoY increase of 45% in rental listings for the w/c March 16th), much of this stock is now being advertised on the long-term rental market.
A declining sales market:
As the sales market weakens, although the usual contra-cyclical effect is increased rental demand, previous recessions have shown that where unemployment rates are high, demand actually decreases while available supply expands as more households bring properties to the rental market that they would otherwise have looked to sell.
Many existing renters who have experienced a significant hit to their income will look to reduce outlays by moving back in with family members, sharing with friends or other couples, or relocating to cheaper accommodation.
As things stand, activity in the market has started to show tentative signs of recovery - although demand is still down by roughly 50% from where it would be in normal circumstances.
Demand from international students is non-existent, relocation companies aren’t relocating and for many schemes construction has temporarily stopped, delaying practical completion dates. Whilst it is expected at some point international demand will return, it is difficult to predict when or at what level.
It is unlikely that there will be a delayed peak season in line with normal market activity and total moves in 2020 are expected to be down by at least 25% compared with 2019.
It’s not all doom and gloom, though. There is still market activity and for those landlords and operators who adapted quickly to adopt technology to support video viewings and are able to offer flexible rental contract start dates, deals are still being done.
The long-term implications for BTR
‘Out of adversity comes opportunity’.
The BTR sector is now perfectly placed to be able to demonstrate the value proposition of the very tenets on which it is based. The phrases ‘customer centric’ and ‘community’ have become part of the BTR bible and never before have they come into sharper focus.
So, when the dust settles, how can the sector build upon this and what can be done to mitigate commercial losses as much as possible?
Across the capital, the proposition offered by BTR schemes is diverse. From heavily amenitised premium-grade accommodation, with on-site teams and premium rents, through to mid-low grade accommodation, (often permitted development schemes) with no amenities, no onsite staff and accordingly much lower rents.
Affordability (as always) will be the primary driver of consumer choice and we have already talked about the impact this will have on pricing. However, not only will renters have less money, they will also likely choose to be even more frugal with it.
With this shift in spending will also come a shift in priorities. Many renters are realising how important the space that they inhabit has become and are identifying desirable amenities that they don’t currently have access to (outside space, a balcony, etc.), or features that don’t really work for them that they want to change as soon as possible.
Community remains as important as ever and those who have prioritised this in their placemaking efforts will have engendered loyalty and trust. This investment now could have a strong return in the weeks and months to come.
Anxiety will be high for many months and may never return to normal, with people having much more concern over things they would not have before.
Cleaning needs to be seen, not just done.
Emergency procedures should all be reviewed.
Staffing will be key.
Many operators have taken steps to move some of the on-site staff into the building, and in the US this is commonplace even in normal conditions. Factoring this into the staffing model should become standard as these staff become the investor’s key workers.
For any staff that cannot live on-site, but will travel to the building, consider providing safe transport so they can commute without needing to use public transport.
While the crisis is far from over, as a sector we are well-placed to adapt to and succeed under new market conditions. It’s encouraging to know that the comparable US Multifamily sector was one of the fastest in the property industry to recover following the financial crash and ultimately experienced the longest period of sustained rental growth.
People will still, and always, need to rent. The opportunity to enhance the value perception of the ethos of Build to Rent has never been higher.
*This is an edited version of an article that originally appeared on Home Made’s website. You can see the full, unabridged version here.
*Jo Green is the Head of Business Development (Build to Rent) at Home Made, a London lettings company specialising in Build to Rent lease up and demand creation.