Build to rent: Where is the market headed in 2019?

On Tuesday we attended the Bisnow’s panel discussion on the future for build to rent (BTR) schemes and the general outlook for the BTR market in 2019.

Flats of tomorrow

With purpose-built BTR schemes, the panel, led by Adam Challis, Head of EMEA at JLL, saw the potential to provide modern living spaces for a new generation of occupier. In particular, the panel discussed the scope of amenities expected by residents, which would include sufficient storage space within flats, concierge services, robust internet connections and communal spaces.

Susan Cooney of M&G discussed a couple of ways in which a greater sense of community could be created through clever design. At one scheme, glass dividers were used between BTR communal areas and commercial space, rather than solid partitions. This transparency helped better integrate the different uses; residents feeling more connected and outwards facing. Similarly, certain commercial tenants were allowed to access BTR communal lounges during working hours.

The panel raised the concern of “over-amenitising” schemes, with residents typically not using the gym facilities as much as expected (despite the majority of residents considering gym facilities an important factor in choosing their homes). Conversely, concierge services may be used excessively for parcel deliveries due to the growth of online shopping, a feature of everyday living that will need to be addressed in the design of the next generation of schemes.

The whole panel identified sustainability as a key focus, driven by both planning requirements and residents. Duncan Sutherland of Sigma Capital noted that greater sustainability resulted in noticeably lower utility bills for residents, and Susan Cooney commented that it also helped reduce the cost of voids.

Looking to the future, the panel agreed that adaptability around future technology was essential, particularly in the context of ensuring effective dialogue with the occupants, as customers. Operators need to be able and seen to manage the issues that arise on site quickly and efficiently so as to maintain and build customer satisfaction and loyalty.

Market outlook for 2019

The market for BTR is changing from a cutting edge investment into an institutional product, according to Alex Price of Palmer Capital. John German of Invesco agreed that the market outlook for 2019 was positive, despite a more challenging past year. A few themes emerged from the discussions:

1. Construction: the panel considered the effect of Carillion’s collapse. Angela Russell of Greystar commented that their deal pipeline had not been impacted by Carillion but lessons could be learned. The panel emphasised that good working relationships between investors and contractors were key – repeat business creates trust on both sides.
2. Funding structures: forward funding structures remain the most common way to fund BTR schemes. Other structures were discussed, such as joint ventures between investors and developers, as well as other mechanisms for investors to share the risk and benefit from letting returns with the developer. The panel noted that debt was available for BTR schemes but more readily so for stabilised assets.
3. Rent control: the industry is aware that rent controls could be introduced in the future, which Angela Russell noted are a common factor for BTR markets across Europe. John German was confident that any impact would ultimately be manageable for investors.
4. Planning: there is no use class for BTR at the moment, and Michael Toone of Liv Capital commented that planning authorities tend to adopt their own approaches to planning requirements for BTR schemes. The panel expect that, in the future, planning will change to reflect this growing use class, and would welcome a move towards the standardisation of planning requirements.

Legal Impact

The panel’s discussions raised certain points that will impact on legal drafting.

1. Rights granted: the place-making focus for new schemes will feed into the lease structures used. For example, commercial operators may be granted rights in their leases to use communal areas of the residential BTR blocks, to generate a greater community feel. Such rights may be limited to certain periods of the day or granted by way of revocable personal licence only, to ensure necessary landlord/operator control. Asset managers should be encouraged to input into the design of new schemes at an early stage, to ensure best practice in terms of how schemes will operate.Equally, the BTR block may form part of a wider development, so the BTR part of the estate may require rights to use any estate common parts. Increasingly, district heating systems are a planning requirement for schemes involving multiple phases, and the BTR element will need suitable rights to connect into any shared systems and engage with the process of managing them or appointing an ESCO.
2. Construction: Carillion has served as a reminder of the importance of strong contractual protections on the construction front, even for schemes that have a tier one contractor providing a “fixed price” building contract. Investors need to ensure that they retain proper control and reserve effective step-in rights. They need to insist on collateral warranties from sub-contractors and clear controls over payments made under the building contract or any forward funding agreement. They also need to be able to manage and monitor the progress of the development and, in particular, the quality of the work undertaken.These protections are particularly important should an investor wish to raise third party finance to part fund a build, as lenders will need to be put in a position where they can properly enforce their security, if necessary.Investors should be especially cautious, when negotiating facility agreements relating to developments, not to set fixed milestones for the progress of the build (or LTV tests based on assumed target completion dates for the build). As Carillion demonstrates, even with an established tier one contractor, there is always the risk of the unexpected being encountered during development and delays to the build programme.
3. Value capture: expect to see the more sophisticated investors focusing on wider value in the context of any “brand” and data capture. Investors need to ensure that they have the ability to change provider and reposition their investment without finding that they are unnecessarily beholden to the outgoing operator and reliant on their continued cooperation.