BTR: A service driven, maturing asset class

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BTR: A service driven, maturing asset class

Summer 2022

Gemma Leonard, Head of Residential at international law firm DAC Beachcroft, examines how increasing breadth and depth of BTR is strengthening its appeal to both investors and tenants.

When considering the future prospects of the UK BTR sector it’s not unreasonable to look at the trajectory of the purpose-built student accommodation (PBSA) market during the past two decades. Both types of residential products seek to meet the needs of a defined demographic in locations which can make development viable and generate long-term income streams.

In its 2020-21 UK student accommodation report, Cushman & Wakefield reported that there are now 681,000 student accommodation beds across a sector which is now worth around £60bn. By comparison, at the end of 2021 the British Property Federation estimated that there were 212,177 BTR homes in the UK of which 70,785 were complete and the remainder were under construction or at the planning stage. So even on that crude measure it’s clear what the future scope could be for the BTR sector, especially with its more extensive potential market.

A rush of investment into UK BTR schemes saw around £4.3bn committed to the sector last year and this should prove to be the tip of the iceberg. Almost every week brings news of a fresh BTR scheme or investment fund. Knight Frank has reported that 76% of this £4.3bn has been aimed at projects outside of the capital. The firm’s Head of BTR, Jonny Stevenson, comments: “Investment into BTR has been rising year-on-year in secondary hubs. In total, more than 60% of the build-to-rent pipeline is located outside of London.”

The market is welcoming increased supply. Grainger plc CEO, Helen Gordon, comments, “When considering the huge market opportunity and the chronic under-supply of high-quality rental homes in the UK - especially in light of the reducing number of small buy-to-let landlords - there is still significant room and opportunity for new entrants and competitors in the market. Rather than a perceived negative, more competition supports awareness of the sector and the benefits of BTR to renters.

“It’s worth remembering that BTR is about much more than just the product. It’s the quality of service and focus on customer care driven by our in-house operating platform that will truly differentiate us. Service will win through.”

In this context, like PBSA accommodation, BTR developments are very much about their brand, management regime and the facilities they provide. Danielle Bayless, COO of Quintain Living sees these factors generally outweighing pricing: “I don’t see increased competition affecting pricing. At good schemes, BTR residents know and see the value of their rental payment – over and above the four walls of their individual apartment.

“From what we’ve seen at Wembley Park, renters are happy to pay a premium for 24/7 property management, exceptional homes and for amenities that are more akin to hospitality than to the private rental sector.”

Like Helen Gordon, she is sanguine about the impact of increased competition: “Where I see the arrival of new players in the sector having an impact is quality - but in a good way for tenants. More competition will mean existing operators need to stay creative and keep very close to the needs of their target markets if they want to retain their competitive edge. Consumers are savvy and they will see through schemes that don’t offer the same value for money, particularly in a competitive market like London."

This theme of increased competition sifting out poor landlords is picked up by Allsop Partner and BTR specialist, Lesley Roberts: “With BTR being only around 2% of all UK rental property, the landlords who are most likely to be affected as the BTR numbers grow, are those who provide substandard rental accommodation at too high a price - essentially exploiting renters who have, presently, little to no choice due to lack of supply.

“Currently, the sector is not competing for existing BTR customers, it’s attracting residents from the wider private rented sector market who recognise that they have options and better choices are available to them at not dissimilar prices.

“I look forward during the decades to come when the number of BTR developments grows to such a level that it forces the wider private rented sector to raise their standards and creates a competitive space in which the BTR developments consider each other competition.”

Certainly, the scale of operators is going to play a pivotal role in navigating an increasingly competitive landscape. Roberts also cites the economies of scale and efficiency that BTR operators can achieve through their buying power and the ability to pass on savings to occupiers in the form of competitive rents.

Knight Frank’s Jonny Stevenson is already seeing this competition in action: “In key regional markets there is competition amongst developers. Rival schemes can seek to compete on price, by offering rent-free periods, utilities included etc.

“Another way schemes can compete is on their amenity offering. Some developments include a range of best-in-class amenities such as gyms, pools, cinemas, roof-top bars. Of course, the more amenities provided, the higher the price.

“The BTR is a service-driven sector, so a high standard of management can often make - or break - occupancy levels. As more schemes become built, and competition grows between operators, standards of management will become a differentiator that residents use to compare schemes."

Bella Peacock, Greystar’s UK Managing Director of Investment Management & Operations believes that residents are looking for more than just an impressive range of facilities: “There has reportedly been a so-called amenity ‘arms race’ in more mature build-to-rent markets. While high quality ‘glossy’ amenities are good marketing tools and can pull people in initially, residents will only stay if there is a real sense of community as this provides them with long-term value.

“On site management is one of the key differentiators for build-to-rent compared with the wider private rented sector. This means that customer service and quality management is critical to success, otherwise residents quickly tire of a building where the basics aren’t done right. We often see our team members highlighted in positive reviews, as they make a meaningful difference to the lives of residents.

“Pricing can clearly come under pressure when you have a lot of product delivered simultaneously in one particular area, but competition drives both differentiation and improvements. We don’t need to create renters, we just need to provide a better service and product for people who need to rent – this means choice. We shouldn’t worry about the market reaching maturity, as it is what we are working to achieve, and it enables us to drive efficiencies elsewhere.”

As the BTR sector matures there will be different models for the development, ownership and management of these assets. Some players will seek complete control through creating and managing assets, but others will develop projects, manage them to a particular level of occupancy and then look to sell the completed investment.

Investors will need to consider the best framework for the ownership and management of BTR assets. For example, the quality of the marketing and management of these schemes is extremely important and if that is being provided by a third-party then the owner must have the ability to quickly switch to a new provider if the incumbent is not performing. In this evolving market DACB sees its role as creating the legal structures which support the successful development and operation of properties that can play a major part in improving the UK’s private rented sector and increasing people’s options for where they live.

As Knight Frank’s Jonny Stevenson observes: “Tenants who are happy will stay put for longer periods of time, which is good news for investors. Lower tenant turnover and longer tenancy terms, means fewer and shorter void periods – resulting in a more secure income stream and reduced operational costs.”

Authors

Gemma Leonard

Gemma Leonard

Manchester

+44 (0)161 934 6429

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