In this third article, Sebastian Moritz – Director of MORICON, will highlight issues around the affordability in BRT, look at its definition, causes for the undersupply of units and how to create more affordable housing and highlights 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’ opinion. Why is there an affordability question? One of the pressing issues in housing is the rising number of tenants that experience economic and basic hardship due to issues such as below and the availability of affordable accommodation: Income is not sufficient to support decent accommodation Looming redundancies because of COVID-19[i] Tenants on Universal Credit scheme experience pay-out delays[ii] “Affordable” accommodation is frequently synonymised with “inferior quality” or “housing estate”[1] and creates apprehension with tenants and developers alike – especially with section 106 planning requirements for affordable housing. 1.1. What are the causes for the undersupply? In most cases the tenure-blind housing planning strategy of the borough, enforced via Section 106 requirements, will be the reason for the backward trend in provisioning of affordable units. A developer will adhere to the mandated requirements primarily to secure the scheme’s approval. Paired with a certain reluctance to mix tenancy typology within a scheme, will not allow for additional units and therefor contributing to the situation. The rigid application of the nationally described minimum space standards[iii]can deprive a development of valuable affordable accommodation that could ease local housing pressure, help developer margins and allow a more flexible approach. An example of allowing flexibility is show-cased at the Addiscombe Grove site (Opitva & Pocket Living) near Croydon:  the original specification called for 12% affordable housing, after a revision of the plans the new permission granted 100% of affordable housing![iv] 1.2. How to create affordable housing (“Additionality”) Being very close to your Local Authority is paramount to influence planning in a positive way, a more flexible less policy driven partnership can yield extra units, as demonstrated in the following: in Crawley – at the ‘Platform_ Boulevard’  – smaller unit-design helped with affordability and more units being provided forward thinking collaboration between Havering Council and Waters Residential[v] Addiscombe Grove scheme: the mix between shared ownership via  Optiva and Pocket Living  Finally, there is the question of which system is better– affordable vs. discounted market rent (DMR)[2]? Whilst the affordability is always integrated with housing strategies and to some extent inflexible, it is a rather prescriptive way to get units built. Therefore by default, only the required number planned will be built, strictly following planning obligations… The advantage of DMR to complement BTR is that it is tenure-blind, which supports social integration and allows the developer to manage the property seamlessly. Covenants would ensure a long rental period; allow for a “staircase” between rents – i.e. via periodic income assessment the tenant can move within the rental discount brackets or even initiate a rent review in special circumstances.[vi] This allows better and more flexible control over housing stock and building targets. Furthermore, it incentivises investors when the flats are released back to the private sector : full market rents can be charged once the covenant expires. 1.3. Conclusion To enable more lower income family’s access to quality accommodation the DMR program is worth pushing forward. Partnership with the Local Authority will alleviate the fear of not meeting “affordability targets” or to continuously stigmatise those tenants. It should result in the provision of good housing stock as fair prices targeting the local applicants thus helping to avoid uprooting families because of housing shortage. There are many ways to answer the affordability question in BTR – it takes an open mind and good will from both – private and public sector – to make a dent into the undersupply… [1] According to the UK government the definition of  affordable housing is as follows: ‘Affordable housing is social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market. Eligibility is determined with regard to local incomes and local house prices. Affordable housing should include provisions to remain at an affordable price for future eligible households or for the subsidy to be recycled for alternative affordable housing provision.’ [2] Discounted market rent (or DMR for short) is a new type of affordable housing for the rental market. It allows build-to-rent developers to offer affordable apartments to rent at a large discount to the market price. This means that rental developers can fulfil their obligation to provide affordable housing without having to build a separate block and hand it over to a housing association. Instead, developers can focus on building one development with the same specification and quality throughout and then earmark certain apartments for the discounted market rent scheme. [i] https://www.landlordtoday.co.uk/breaking-news/2020/6/sharp-rise-in-rental-arrears-as-300-000-tenants-fail-to-pay-on-time [ii] https://www.independent.co.uk/news/uk/home-news/coronavirus-universal-credit-payment-delay-dwp-lockdown- a9459226.html [iii] Ministry of Housing, Communities & Local Government  (MHCLG): Technical housing standards – nationally described space standard (March 2015) [iv] https://www.optivo.org.uk/Property-home/News-developments/addiscombe-grove-croydon.aspx [v] https://www.constructionenquirer.com/2020/06/10/plans-in-for-east-london-1380-home-estate-rebuild/ [vi] https://www.arla.co.uk/media/1046326/london-first_build-to-rent.pdf

  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. 1.   Barriers to completion & profitability 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. 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 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. 1.2. Long Term Barriers 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. 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 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. 1.3.2. Operations 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. 1.4. Tech Opportunities 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. 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 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. [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