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
Barriers to Completion and Profitability
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
Meeting Rental Demand in the UK
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
How to best manage your company’s Home Views Rating
How to best manage your company’s HomeViews Rating Like buying a car, buying or renting a home/apartment is one of the most expensive and far-reaching decisions you will make; until now, there was a massive imbalance when buyers went about their decision – the car industry honed over decades a myriad of ways to inform about models, makes, performance and other metrics and all of this is readily available via printed or online publications. Until now, deciding on a home has been very trying; you needed to visit the place, make inquiries, rely on agents’ feedback, etc., and were never as informed as you wanted. Since February 2019, this has received a massive boost from HomeViews – an online dating service, with feedback published – similar to hotels – by tenants, sharing their views concerning location, facilities, management, design and value. Those metrics are obvious to prospective tenants and buyers and give a fair amount of information from the community living at such properties. This is a game-changer, similar to the advent of Tripadvisor for the hospitality industry – since its introduction in February 2000, the site has published over 760 million reviews of restaurants, hotels and attractions and has 490million visitors that post 270 reviews per minute – wouldn’t you say this is powerful stuff? If the Home Views reviews are positive and your organisation has met the expectations and delivered a positive experience, all is well – but what happens if that is not the case? Negative reviews are seen by thousands of potential customers influenced by reviews and how they are reacted to. You, as a landlord, should answer any reviews to mitigate further publicity issues; this requires a new way of thinking: your response is on one side, addressing the problems at hand but is also communicating your brand values and ethos (i.e. how you deal with “stuff”) to a broader audience. Responding to HomeViews comments pays: Research released mid-December 2019 from Ipsos Mori in partnership with TripAdvisor has revealed that customers are more likely to book after seeing owners react to online reviews. A poll of 23,000 travellers and diners worldwide showed that 63% of respondents said they would be more likely to book a hotel or restaurant if the owner responded to most reviews. When a property owner leaves personalised responses to reviews, over three-quarters (77%) of TripAdvisor travellers said they are more likely to book. Even among respondents who stated they tend to focus less on online reviews, over half were still able to book if the owner responded to reviews. Over two-thirds (67%) of respondents agreed that they find it helpful when they can see the context of negative reviews and apologies to guests from management. In this new residential model, the primary source of revenue is the individual resident or customer generated through rent and services. This places BTR firmly in the consumer market culture, where keeping the customer happy and loyal is critical to securing ongoing revenue. In good BTR schemes, the customer is central to design, operational and income generation dynamics. MORICON Consultants Ltd. can help landlords not only to finetune their operation, but also to optimise their tenant’s score via HomeViews and create a more positive brand image: • Root-cause analysis of issues through a detailed review of tenant comments. • Detailed audit of standards or creation of new standards – based on extensive hospitality knowledge to streamline front and back-of-house operations. • Review of existing customer complaints processes. • Interviews with tenants to analyse existing complaints. • Training workshops for your concierge team. • Guidance in response writing based on your communication brand standards. • Creation of benchmark operations standards to underpin your business
