BTR 2017: That was the Year that was. But what of next?

tempora mutantur, nos et mutamur in illis

Was 2017 the year that Build-to-Rent finally came of age? No, not really. There’s much to learn still, and whilst we continue to keep a weather eye on our cousins across the pond, for both good and bad practice, it’s clear that we have to forge our own brand of ‘multi-family’ living.

So what of 2018? Well, the BTR sector is at a point where we’re close to 100,000 units either having been delivered, in the process of delivery or in planning. The really interesting, purpose built BTR schemes have yet to come to market. The majority of delivered schemes so far are a mix of PD and bastardised ‘for sale’ blocks adapted to fit the template we all harp on about. Reading between the lines in a recent ’The Times’ article about planning not being fit for BTR purpose, it was clear that house-builders are looking beyond ‘help-to-buy’ for their next subsidised product. 

It’s been done to death, but we will start to see the sector seriously consider differentiating itself through a separate planning class. Why? Viability, S106 obligations, taxation (including VAT). Such a change may not come to pass, but with institutional involvement, the journey’s end is always going to be unimpeachable structure and professionalism. We will see little let up in BTR activity and we could be looking at close to 150,000 units by the end of 2018 as institutions, funds and sovereign wealth becomes ‘comfortable’ with this ‘alternative’ asset class. 

Which leads me on to the evolution of operational management. We shall see our new management tested for real and there will be some fairly high profile failures. Early movers in this have tickled the G-spot of many landlords but, like many things, the early rush of pleasure and attraction will be replaced by the more prosaic desire for delivery. That’s the tough part, and not everyone is up to it. So, with the wakening of the operational Titans and the desire for institutions to de-risk management to resource rich organizations, we will begin to see some changes.

PropTech occupies me at the moment, and it’s fairly clear that the industry is in exponential growth but there’s still a gap between analogue and digital thinking. There’s no point having great tech if all it produces is the result of analogue input. It’s merely a translation. That will change in 2018. We will see AI and visualisation advances this year and greater a reliance on reaching out to customers via social media channels. Of course, that means data. This is one area BTR will change the world of renting. We will be flooded with data. But the skill is in interpretation; to get the right answer, one has to ask the right questions. There will be a lot of questions in 2018, not least of which will be ‘can traditional agents survive?’ My answer to that is I feel they will, largely, go the way of Kodak.

Affordability: my old hobbyhorse. There has been and there will be some ‘adjustment’ in the sector, which has to become more sensitive to affordability. I feel it’s reasonable to assume an institutional landlord backed by great management and amenity can achieve a premium over a broadly equivalent BTL landlord. But they mustn’t fall into the trap that they can base their premium rents on or above the upper decile. Some have, and some will continue to do so. It will cause some pain. My concern for 2018 is that as more product is delivered it will be harder to achieve premium rents. A few days ago Harvard released their 2017 review and it had some stark warnings for the US Multi-family developers who, in Harvard’s view are building too many ‘premium’ units and ignoring the hoi polloi. It reflects my feeling of where we are in the UK. Harvard’s research can be found here

Finally, yields: all things being equal we should look at mature markets, especially Europe, and consider the profile of the ultimate owner who is very likely going to be in it for the long term, and what effect they have had on sectors where they have become involved: ground rents for instance. What that generally means is yields become compressed, especially as the asset becomes more mature and a consistent NOI is being delivered. Clearly interest rate rises will impact, and there will be more of them, but I believe net compression will evolve with institutional grade assets yielding some 50-75 bps below that of less secure residential assets. The net effect of course is higher capital values. 

So my Christmas message to anyone in BTR is: wherever you start your journey in 2018, have one eye on the end of the road. Because at the end of that road is an institution. The value of the asset, whenever that value is realised, will depend on you having ticked all the institutional boxes each step of the way.

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© Richard Berridge