In this last instalment of the series, Sebastian Moritz – Director of MORICON, will look at the impact COVID-19 had on the industry. What are the effects for tenants, property owners and investors and what are possible solutions. Closing this article, he looks at the sustainability of the BTR model, the financial considerations and processes.
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.
The current pandemic will create a shift in the rental market – for businesses as well for tenants that was unprecedented. Covid-19 caused more of a massive impact than felt during the financial crisis in 2008 or SARS in 2003.
The financial impact will have several facets: tenants being furloughed or made redundant will impact their rent payments[i]. Once the government’s ban on evictions on August 23rd[ii] (extended from 25th June via MHCLG) is expired, the market must make some difficult decisions[iii] – especially for younger tenants: will evictions be the norm or is the industry opting for a phased payment model similar to the commercial tenants? There is however a sentiment that the situation is not that desperate: the Home Let Rental Index reported, that despite COVID-19 rents in UK grew in May, except for London and Northern Ireland.[iv] In the last statistics from the Office of National Statistics (ONS), the level of rents have risen to the highest level ever[v] – which will create a many tenants vying for a decently prices accommodation and thus creates a new higher barrier to rent.
This all has created a sharp increase of rental applications and movement on the market.
How someone is looked after in a time of crisis will be remembered and capturing this insight and sentiment from residents now will be powerful for longer-term brand reputation and loyalty. Now is a good time to be speaking to residents, getting feedback, and making sure residents’ needs are met. How property owners deal with rent-arrears, repairs, customer satisfaction etc. will have significant impact on their cashflows but also on their reputation and perception in the market.
Making the most of your property’s amenities can also help to create a better functioning community for the building. This helps strengthening the income stream because of reluctance to move away and enjoy more referrals that way.
Lastly – the traditional high street agents will struggle with marketing and conversion operating the “old way”. A well-rehearsed virtual walk-through and subsequent advertising on social media will confirm the growing shift from outdoor above the line (AIL) to online through the line (TTL) campaign via social channels.
The latest research from Property Hub has revealed, that 98% of property investors still consider property to be a good long-term investment. Many investors ride out the challenges, but others are eager exploiting new market conditions. With 80% saying they are likely to invest over the next six to 12 months, compared to the 19% who have shelved their plans for the time being. [vi]
The survey continues that only 6% of investors surveyed expected rental values to drop, while 19% are expecting an increase. While the report initially thought investors might start to have a bias towards income-generating properties, this indicates their strategies might not change at all and investors will still be in two categories. Those who invest primarily for capital growth (long-term) and those who invest for income – although there are those who combine the two.
The BLT property owner on the other side is more under siege: falling rents, unemployment, lack of suitable BLT mortgage products – those with over-extended borrowing might be forced to sell.[vii]
Investors / Owners can combat this pressure in adapting to the new market conditions, by:
Whilst there is no dispute that the property market is going through a significant shift, there are a lot of opportunities to invite long-term investment. Investment returns in property performed reasonably well in the last 30 years. This was especially true during 2000 – 2014, when the stock market was very volatile (9/11, SARS, Financial Crisis, etc.). Therefore, it has always been a part of a diversified portfolio.
If you move your company into a REIT structure that can be traded like shares, you can increase your portfolio and access to cash. This is especially advantageous through the continued dividend re-investment. For self-financed projects, the government’s HCA Built to Rent Funds 1 and 2 and the debt guarantee scheme for PRS are avenues to pursue. However, there is still a long way to go to remove barriers to institutional investment in PRS, as the well-known Montague review recommended as early as 2012[ix].
Another consideration is to buy into your competitor – during turbulent times under-performing companies might fall prey to the opportunistic operator[x]. Undervalued businesses are equally attractive as undervalued sites: Canada’s Brookfield Asset Management buy of 7.3% of British Land followed Hong Kong-based Lifestyle International Holding’s revelation of obtaining a £ 50M stake in Land Securities. Since the 1990ies, UK real investment trusts traded with historic discounts to net assets value, which opened the market for buyers in search of value.
Big land projects undergo similar turbulences as the stock market. However, their ability to shield themselves from major upheavals has often been seen. The attractiveness of more significant projects is ticking all the right boxes:
This requires positive and actively managed relationships with the Local Authorities. For example, Barking Riverside Regeneration (L&Q partners with GLA) or Mount Anvils’ recent loan from GLA to finance the project. These positive relationships assisted in integrating the local communities to support the project.
Finally, there is the diversification strategy: purpose student accommodation or senior living projects are still lucrative markets with excellent long-term income.[xi]
To maintain their competitive edge, companies might need to revisit changes to their processes – both operational and in construction.
This includes a closer look into modern construction methods (MMC) to see if better values and returns can be obtained. Modular or timber frame construction will cut costs, drive profitability, and shorten the build-process. [xii]. With a lot of the European labour force being sent home during COVID-19 as well as new immigration laws[xiii], this method of construction can claw back timelines as well as reduce site costs.[xiv]
The other component in the approach lies in modular and meanwhile construction. Unlocking one part of a site fast to build momentum and start the income streams makes this a desirable proposition. This helps especially at larger regeneration projects but also for niche projects with complex time or site constraints and highway infrastructure.
The BTR is all about service and community. Improving current and future operations will secure longer tenancies and income streams. This, paired with refocusing space planning and utilisation (less parking in favour of car-sharing, more “in-demand” amenities such as work pods and mini-offices), will attract more potential customers to the brand.
While the market is still in turmoil, the sector is best placed to emerge well. After the financial crisis, the US multi-family sector recovered the fastest with a decade of growth[xv].
This period has also highlighted the resilience of the multifamily sector. Rent collection rates have remained high, and historically, rents have declined less and recovered quicker during downturns. This gives investors some confidence to proceed.[xvi]
The industry must manage the shift by listening to customers and caring for and curating their communities. If operators are forward-thinking and future-embracing and have the agility to change, I believe many lucrative opportunities are available. It all depends on how quickly change can be implemented.
Moving forward, substantial investment is in the pipeline, with just over £1.4 billion worth of deals currently offered. This is broadly equivalent to the investment pipeline at the end of 2019, translating into £1 billion of investment in Q1 2020.
[vii] Times: Saturday, 30th of May, Property Section
[ix] Ministry of Housing, Communities & Local Government (MHCLG): Private rented homes: a review of the barriers to institutional investment. Independent review by Sir Adrian Montague, published August 2012
[x] Times, Saturday, May 30th, Canadians in landgrab of UK property companies, Business Section p.44
[xiv] Property Week, 5th of June, Insight Guide: Strategic Land