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’ opinions.
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.
As COVID-19 significantly delays project continuation and completion, questions regarding short- and long-term profitability and what barriers prevent operators from being profitable are asked.
The most immediate impact on completion lies in the still stand of sites and the lack of non-UK workers available. These factors are entirely outside the developer’s control, whilst the impact on cost is considerable. About 80% of all sites closed in May due to the Coronavirus Act 2020 (the “CA”) legislation.[i]
For completed schemes, the mounting rent arrears will significantly impact 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 is in default, and one in five tenants is at risk of losing their jobs 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.
When the lockdown lifts, permissible costs for the construction business to comply with new legislation can mount. These can include multiple trips of workers to the site, higher costs for PPE, and higher site welfare hygiene costs. All of these must be managed proactively in-house and with clients[iv].
The other area impacted are cashflows: as outlined in 1.1, COVID-19 (and our article about the impact of COVID), 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 is 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, a lack of international students, and relocations being put on hold, keeping the rents lower than planned.
Financial and operational aspects are the two main drivers for any organisation to impact profitability:
Access to cheap capital is crucial – yet only 70 companies are listed on the London Stock Exchange as tax-preferred REITs. This is just one-third compared with 225 listed companies at the NY Stock Exchange and features a 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 a higher yield than bonds. REIT structures can help 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 that can be turned around together with the local authorities.
With the market in flux, the BTR sector should focus on its customers with a long-term view of profitability: driving down vacancies, minimising turnover through good estate management, and improving services, all to increase customers’ lifetime value.
A favourable public representation of the organisation will attract more customers. Portals such as HomeViews will play an essential role in allowing customers to familiarise themselves with the scheme, the management culture, community activities, and your customer service. This, in turn, minimizes voids, creates faster tenancy churn and results in unstable income.
Using technology as much as possible to streamline operations without losing the human touch will result in 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 potent instrument to align the organisation regarding loyalty, commitment and culture: referral fees/incentives are cheaper than new acquisition campaigns and worth investigating.
Social distancing has accelerated the property sector’s tech innovation by at least five years in the last two months. Virtual viewings are replacing traditional agent viewing, and contactless communication and payments are gaining acceptance. A well-trained and rehearsed agent can be more meaningful and informative during a virtual viewing and host more clients.
The following 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 reduce construction overheads.
BIM technology manages the Whole Lifetime Cost (WCL) calculation of developments far more quickly. This allows accurate predictions on replacements, maintenance work, and costs and significantly impacts the scheme’s net yield.
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 events should play a lesser role in the long term – real estate has always been the most stable of all asset groups, and COVID-19 is no different.
An open-minded approach to new technologies and business practises will help to secure margins, tear down existing barriers to completion and profitability, and lead the industry back to stability.
[vii] Building Information Modelling