Barriers to Completion and Profitability
Views on the current situation of BTR market and its influencers in 5 articles (2 of 5)
MORICON Consultants shares thoughts on the Build to Rent market in the UK over a series of 5 short articles. The topic was part of the IRPM Build to Rent Level 4 course assignment and reflects only the authors’ opinion.
In this second article, Sebastian Moritz – Director of MORICON, will look at some of the barriers to completion of projects. In particular, what barriers to completion and profitability exist in the short and long term, how will profitability be impacted and highlights possible solutions.
1. Barriers to completion & profitability
As COVID-19 causes a significant delay to the continuation and completion of projects, questions regarding short-and long-term profitability are asked as well as what barriers prevent operators from being profitable.
1.1. Short Term Barriers
The most immediate impact on completion lies in the still stand of sites and the lack of non-UK workers available. These factors are completely outside the control of the developer whilst the impact on cost is considerable. In May about 80% of all sites closed due to Coronavirus Act 2020 (the “CA”) legislation.[i]
For completed schemes the mounting rent arrears will have a major impact on the short-term profitability – currently the number of rent-arrears for BTL property owners is rising[ii] – especially with the younger generation of renters. A recent study suggests that one in 15 tenants are in default and one in five tenants are at risk of losing their job in the next three months.[iii] This will have a significant impact on operator cashflows.
The variety of Planning and Regulatory hurdles cannot be forgotten. In my previous article in this series “Meeting Demand” they fall into the short-term barriers that need addressing.
1.2. Long Term Barriers
When lockdown lifts, permissible costs for the construction business can mount to comply with new legislation. This can be by multiple trips of workers to site, higher costs for PPE, higher site welfare hygiene cost. All of these must be manged proactively inhouse and with clients[iv].
The other area impacted are cashflows: as outlined in 1.1, COVID-19 also resulted in a crash of the short-let market (+45% increase of listings) and a decline in the Sales.[v] The knock-on effect are more cost-conscious renters as trends in London (rents dropping by up to 15%)[vi] show .Demand for rentals will be slower, fuelled by renters moving out of cities, lack of international students and relocations put on hold, which will keep the rents lower than planned.
1.3. Profitability Outlook
Financial and operational aspects are the two main drivers for any organisation to impact profitability:
1.3.1. Financial
Access to cheap capital is crucial – yet only 70 companies are listed on London Stock Exchange as tax-preferred REIT. This is just one third compared with 225 listed companies at the NY Stock exchange and features volume of $1 trillion vs. £70 billion in the UK.
Tapping into the private investor market is another long-term strategy to secure access to capital, as private investors prefer the higher yield above those of bonds. REIT structures can help to unlock extra capital with tax incentives, this allows a bigger investment pot for the acquisition of undervalued assets and/or to develop fewer desirable sites which can be turned around together with the local authorities.
1.3.2. Operations
With the market in flux, the BTR sector should focus on their customers with a long-term view of profitability: driving down vacancies, minimising turnover by good estate management and by improving services, all to increase the lifetime value of customers.
A favourable public representation of the organisation will attract more customers. Portals such as HomeViews will play an important role in allowing customers to familiarise themselves with the scheme and the management culture, community activities and your customer service. This in turn minimizes voids, creates faster tenancy churn and results instable income.
Using technology as much as possible to streamline operations without losing the human touch will be rewarded by better yields and improved synergies across the portfolio. New management systems measuring customer loyalty and how effectively the company values are practised should be used across the industry.
For example, the Bains Net Promoter Score is a very powerful instrument to align the organisation regarding loyalty, commitment and culture : referral fees / incentives are cheaper than new acquisition campaigns and worth investigating.
1.4. Tech Opportunities
Social distancing has accelerated the property sector’s tech innovation in the last two months by at least five years. Virtual viewings are now replacing the traditional agent viewing, contactless communication and payments are gaining acceptance. A well trained and rehearsed agent can be more meaningful and informative during a virtual viewing and is able to host more clients.
The next big significant change lies in the further development and acceptance of BIM[i] and the drive to move from BIM Level 2 to Level 3 with scan-to-BIM technology. This will increase collaboration speed between teams, allow a more exacting measure of spaces for renovations or sales presentations and reduces construction overheads.
BIM technology manages far easier the Whole Lifetime Cost (WCL) calculation of developments. This allows accurate predictions on replacements and maintenance works and costs and have major impact on the net yield of the scheme.
1.5. Conclusion
The industry will suffer in the short-term because of unplanned operational expenses, a general upheaval in the market and a higher risk of tenants defaulting on payments. However, these are events that should in the long-term view play a lesser role – real estate has always been the most stable of all asset groups and COVID-19 is not different.
An open-mined approach to new technologies and business practises will help to secure margins, tearing down existing barriers to completion and profitability and to lead the industry back to stability.
[i] https://www.building.co.uk/news/work-stops-at-80-of-uk-housebuilding-sites/5105470.article
[ii] https://www.landlordtoday.co.uk/breaking-news/2020/5/rising-rent-arrears-likely-to-mount-as-tenants-face-financial-hardship
[iii] https://www.landlordtoday.co.uk/breaking-news/2020/6/sharp-rise-in-rental-arrears-as-300-000-tenants-fail-to-pay-on-time
[iv] https://www.building.co.uk/news/in-pictures-social-distancing-on-willmott-dixon-sites/5106047.article?utm_medium=email&utm_campaign=Daily%20Building%20%20Daily%20News&utm_content=Daily%20Building%20%20Daily%20News+CID_9a7e27fd008d742e677466c3a102229c&utm_source=Campaign%20Monitor%20emails&utm_term=In%20pictures%20Social%20distancing%20on%20Willmott%20Dixon%20sites
[v] https://www.propertyinvestortoday.co.uk/breaking-news/2020/5/the-world-has-changed–what-next-for-build-to-rent
[vi] https://www.landlordtoday.co.uk/breaking-news/2020/5/london-rents-drop-by-up-to-15-amid-the-coronavirus-crisis
[vii] Building Information Modelling