In this first article, Sebastian Moritz, Director of MORICON, will look at ways to meet rental demand in the UK, explain what causes the undersupply, and highlight possible solutions. 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. 1. Meeting Rental Demand in the UK In February 2017, the British Property Federation published a widely reviewed report on unlocking the benefits and potential of BTR (Build to Rent) for the UK Housing market[2]. The paper highlighted a range of measures undertaken by the government, local authorities, and the private sector to ensure steady growth in the housing market in support of the failing house-building targets. In 2020, the BPF (British Property Federation) reported that 43,236 units are complete, 33,505 are under construction, and 80,771 are in planning, for a total of 157,512 units[1] – well short of the envisioned target of 200,000 units. 1.1. What are the main issues for undersupply?
The best approach to service charge: make the “unknown” known early enough!
In my consult, I often see a repeating challenge for sales teams: the known “unknown” of annual service charges. As a result, unsubstantiated figures create a lot of hassle in all project stages, and few realise that the solution can be straightforward. What is meant to support the early sales effort does not have the desired effect and can even backfire. That said, I believe that service charge budgeting can be easy! One of the first questions every potential buyer asks is the level of service charges. The running cost is the most significant “unknown” fact to all the sales agents, marketers, developers and buyers. Numbers are frequently guesstimated to present a budget early on in support of off-plan transactions. Therefore, those numbers are often entirely wrong as their validation method is inaccurate. Subsequently, as the process is imprecise, the result leads to many unsatisfied buyers and embarrassment when the “real” numbers are available. The Drivers of Service charge budgets In this short article, I try to shed light on the “unknown” issue to avoid the above complications. It starts literally at the very beginning of your project and vision. Furthermore, I will demonstrate that arriving at a reasonably accurate number is possible in the early stages of your development process. So, here are the main drivers for your budget: staffing, utility consumption, insurance, facility management, management fee and VAT – the rest comprises smaller service charge budgeting items, licenses, permits, supplies, etc. The Service Charge Process It would be best to have a clear decision of the operational requirements at the beginning of the planning process. Firstly, you must establish how you run and manage the building after practical completion. Secondly, how much staffing do you require, in what capacity, etc? This mandates a thorough understanding from all involved parties, namely the designer, architect, and developer, of what the result will look like. Thirdly, this also includes how you manage the project later, i.e. agency staffing, self-management or part of an integrated branded management platform. The next stage is deciding the utility and operating costs for the building. However, this is a bit more challenging as the exact numbers are only available in stages 3 and 4 with the start of the technical design and procurement process. However, much information can be pro-actively obtained within the planning phase. With this ongoing intelligence, you can estimate a reasonably accurate model. Finally, the figures can be substantiated after the available asset register. Following the cost of the operation, the next oversized item is the building’s insurance value. A point often overlooked is that this number is twofold: one part is based on the rebuild value, and the other is often the terrorism damage cover. Once you are in the last stage of the project, you get the exact values to confirm your initial number. The difference will not significantly impact the budget if the initial due diligence has been exercised. Facility management is another complex number in this process, as several “unknowns” exist here. To begin with, knowing what M & E equipment is used allows you to plan. Following that, finding out what amount of work is required to manage the daily operation is crucial. Lastly, visiting the building and seeing the installation allows you to calculate what needs to be done, by whom and at what level of service. Again, having a high level of due diligence and discipline would be best. Estimating the numbers at an early stage of the project requires collaboration across your teams. In the end, a massive swing should not occur at the point of completion, and a manageable figure is on the table. Also, one of the biggest drivers in your service charge budget is the use of energy – a thorough calculation is absolutely essential – yes, by piece of equipment throughout the project! Whether you manage the building or outsource the contract, this activity will incur a management fee. However, there are two possibilities for managing the building: self-management and contract management. First, if you manage the building, you can apply a discounted or total rate. In the latter instance, any third-party management company charges the total amount. Those fees are typically around 8% to 10% of the budget. Finally, VAT: is your service provision (staffing) VAT-able or are the colleagues employed by the building and therefore their services VAT-free (as this is the case for the UK)? As before, you must answer this question at the very beginning of the project. Depending on the level of service envisioned, this adds up very quickly. In the case of third-party staffing, your VAT for this runs well over £50K – £100K per year, adding nearly £ 0.50 to £ 0.80 per sqft to your service charge budget, depending on the size of your building. The Outcome This early service charge calculation method is advantageous because it increases the accuracy and confidence of your approach to the market with your figures. On the negative side, a good number of projects in PCL start off-plan with a number that grows throughout the project by up to 20% to 27%! Imagine you invest in a couple of units and calculate your yield based on inaccurate information. You make a big mistake if you copy what your competitor is doing simply to be aligned with them. It is essential to realise that each building is unique in layout, operational management and design. Furthermore, using a “convenience number” to please the sales efforts is wrong. Therefore, working your agents and suppliers hard for realistic numbers is a short-term pain, outweighing the long-term gain of trust and reliability as an operator/developer. Your brand reputation must get those numbers as correct as possible the first time. To help with the outcome, building an 8% to 10% buffer for unanticipated events is good practice. As indicated, this buffer is for “surprises” – such as higher staffing costs due to new Brexit regulations or higher operating costs because COVID-19
Residential Business Continuity Planning: The Good, the Bad and the downright Ugly
What is BCP? Residential Business Continuity Planning (BCP) is commonly defined as “…the process of creating systems of prevention and recovery to deal with potential threats to a company”. In addition to prevention, the goal is to enable ongoing operations before and during execution of disaster recovery. BCP is a subset of risk-management and deals with your organisation’s resilience to function in the face of adversity. The approach is common practice for major global companies across a variety of sectors – especially in the IT sector, financial institutions and companies that manage a complex network of supply chains and data or hospitality organisations such as Four Seasons Hotels or Marriott International – they all have a range of diverse BCPs in place, national or regional risk management committees etc. But, how does this relate to the real estate industry? Do all the managed buildings for PRS or B2R follow the same best practises? Are you ready? In view of the global CORVID-19 crisis, how does the resilience planning and preparation in PRS/B2R sector feature, how well is your organisation prepared to deal with this threat – on local level as well across your organisation? What have you done to pre-plan for your staff and customers to continue to enjoy a safe environment when faced with adverse and dangerous situations – are you prepared or helpless? Let us have a closer look at what is the importance of BCP and what are you potentially missing out on? As the threats can change based on your location there is not a one-fits-all approach, but you can start thinking about what could go wrong and start the process. Business Disruptors The most frequent disruptors for your business are the obvious ones: · Cyber attack · Random failure of mission-critical systems · Data corruption · Sabotage (insider or external threat) · Earthquake · Single point dependency · Epidemic · Supplier failure · Fire · Telecomms outage · Flood · Terrorism/Piracy · Hurricane or other major storm · Theft (insider or external threat, vital information or material) · IT outage · War/civil disorder · Power outage · Water outage (supply interruption, contamination) Whilst some of the above might not immediately jump out, think across your organisation – do you have assets that could be impacted by earthquakes or floods? For example, recent meteorological events in the UK suggest that flooding and strong winds will become more and more a two to four year reoccurrence – irrespective of you believing in global warming or not – your organisation faces a real threat with reputational and financial consequences. Or think of 2011 – civil unrest in most parts of England following the death of Mark Duggan – did you think it possible that your business is interrupted by riots? Fluidity of Business continuity Planning The crucial element in BCP is to maintain fluid in your planning approach – as life changes all the time, so does needs your planning – the need to remain agile in the heart of your preparations is paramount; to counter-act all possible changes, regular and meaningful reviews as well as training are part of it, similar to a targeted procurement plan for first hour responses (flashlights, blankets, high-viz clothing etc.) If your business has a BCP framework, you will typically have an annual or 6-month cycle of “BCP maintenance” for each of the scenarios: Confirmation that all the information in the manual is valid (such as addresses, phone numbers, processes etc.) and training across the organisation/business unit to staff or critical individuals is done – and documented Testing and verification of your solutions to the threats and mitigation measures Testing and verification of the recovery operations of your organisation Any deviation / change to the original process must be analysed, documented and implemented. This part is vital to ensure that your BCP is a “living and active” document and not a painful corporate initiative that is relegated to the bottom shelf as soon as possible, in order to tick a box or to make time for more pressing issues. The Good A good organisation would have a range of scenarios identified as threat to the business, complete with the appropriate measures to bounce back in due course. Plans are implemented and trained throughout the business and rehearsed, re-trained and re-calibrated at least once a year to guarantee functionality. In case of a scenario the planned response is initiated without delay and struggle, the entire organisation is pulling in one direction to prevent a major loss for the business. The Bad The bad way is having some sort of plan in the beginning, but over time this is not made a priority and therefore most of the content is outdated and obsolete. In case of adversity the organisation is depending on few individuals that are alert and in key positions to “muddle through” the crisis, whilst accepting that there will be a felt impact on the business – be because of financial loss, damage of goods and installations etc. The Ugly The ugly scenario is – well, you guessed it: there is no BCP planning, your employees are not trained and are likely to panic and your fate hinges on the luck of having a few individuals that may keep things together until the crisis is over. You can assume greater financial losses, loss of reputation- and in the worst-case, severe damage to your business and/or loss of life of team members or customers. I don’t think that in today’s environment you can let chance decide about your business’s reputation and survival by not having a planned resilience approach. Conclusion I have worked on several BCP projects – specifically for hotels and residences. Being IOSH[1] trained, I am fully qualified to write risk assessments. I am very familiar with the creation of BCPs and can assist your business with the planning of your specific threat mitigation processes. My hospitality experience combined with property management knowledge enable me to adopt a very varied
Branded residences: Challenges and opportunities for Hotelliers
The following article about branded residences was published in the Q3 edition of the International Luxury Hotel Association, highlighting the challenges and opportunities for hotel operators entering the residential sector. The challenges and opportunities of developing branded residences for independent hotels This article focuses on independent hoteliers’ challenges and opportunities when contemplating adding branded residences to their current business structure. Significant brands already heavily invest in the residential market – backed by well-known brand promises and global support structures – listed below are some essential factors confronting non-branded hotel organisations. To emphasise the economic power, the branded residences sector currently features over 55,000 apartments in 406 global schemes, served by over 70 hotel operators, and built in over 180 locations in 64 countries – with Marriott, Accor and Four Seasons accounting for over half of them. It is, therefore, very tempting for non-branded operators to jump on the bandwagon of residential property. Still, it pays dividends to ensure that the pros and cons of such an investment are thoroughly investigated to avoid a copycat situation that creates many problems. At first glance, there are a lot of advantages to embarking on a branded residential project as an independent operator: • Hotel development cash flow – selling residences off-plan to fund at practical completion via capital payments. Also, there is the potential for substantial management fees if you self-manage the project afterwards. • Branded residences with hotel access command premium –recent studies by Knight Frank, Savills and Graham Associates (https://gagms.com/) all put the premium at around 30% by established branded residence operators compared to non-branded residences; however, huge fluctuations need to be acknowledged depending upon the location (i.e. -15% discount in NY to +60% in Bangkok). • Avoid cyclical or seasonal variations – an occupied residence creates cash flow throughout the year via service charges and residential service consumption. • Premium valuation of own brand – a successful project allows for heightened visibility of the hotel project and showcasing service excellence. • Value-Cost benefit –residences can deliver higher values than average hotel accommodation on a per-square-foot capital value basis. • Binding loyal customers even more – hotel services delivered at the same standard as well as maintenance & caretaking entice extra spending from loyal customers. • Lock and Go piece of mind – customers enjoy carefree usage of their property, when in residence or not. • Market differentiation – allows new prices, branding standards and services to be set to compete in complex or saturated markets. While this all sounds great and logical, if you don’t look behind the curtain, you might be in for a rude surprise, putting your customer’s goodwill and financial health at risk. One of the significant factors behind branded residences for hotels being so successful lies in their structure; they are part of a mature global operation and, due to their size in the portfolio, cash flow and reach, they are not only able to attract the required capital more efficiently but also have the operating knowledge as well as staffing expertise and service standards gained over years of experience. Let’s have a look at what pain points you might experience when jumping onto the residential bandwagon: • Cash flow –the cash-flow process is different here as you only receive monies after the apartment handover after a successful sale. Also, it would be best to account for expenditures such as one or two months of staffing cost, up-front insurance payment for the building, pre-opening operational equipment, etc., which can cause a strain. • Residential marketing –with the market total of comparable units for sale, you need to consider how to differentiate yourself from your competitors regarding presentation, service and operations. You might only get five minutes to convince people of the services you can offer whilst they go through the traditional viewing experience, which is considerably less than in conventional hotel marketing. Professional marketing guidance is strongly recommended. • Legal platform – I strongly recommend structured legal and sales advice before you start to guide you through homeownership rules, management agreements, leasehold contracts, service charge budgets, home association rules, building regulations, etc. You need to be aware of the building liabilities and warranties you have to back – some can elapse within 12 months, some only after ten years. Lastly, what will happen if you need to sell the hotel – what happens to your residential services? • Space Planning – it is very tempting to max out your available sellable space for storage, garage parking and other commercially attractive opportunities, but don’t forget that you might also have a team of service professionals who will live and breathe your mission and vision. If there are space constraints, you will hinder their efforts for years. This might lead to higher staff fluctuation, higher cost of operating the building – and eventually, erudition of the customer’s trust. It’s a false economy. • Alignment with existing business – are you venturing into luxury branded residences or family-friendly offers? How do you plan to align both operations? This states the obvious: are you ready to have another 24/7 operation in addition to your hotel – with guests that technically never leave (which can create its dynamics!)? Are you still pursuing a residential addition to an existing hotel operation? Knight Frank flags the entry of smaller hotels or even non-branded hospitality brands as a new trend to watch. Regarding marketing strategies, your customers want to be associated with your brand and partake in the benefits of your offering. You will appeal to like-minded customers who want to live and socialise with others who share everyday things. The residential market is still very competitive but offers substantial benefits. To thrive and survive, you have to ask yourself: what can I do better, and where can I be different from what the competition does? Chris Graham from Graham Associates forecasts that many more 3- or 4-star operators will venture into the serviced apartment and branded residences markets, as they won’t be
