It’s no longer about landlords; today’s property managers recognise that happy residents are at the heart of any successful scheme. Yardi invited a panel of experts in Leeds - a ‘northern powerhouse’ city heavily invested in cutting edge build-to-rent development - to discuss the rapidly-evolving sector.
Our panel of experts
Graham Bates - founder and chief executive - LIV Group
Jonathan Pitt - national director, corporate PRS and build-to-rent, Countrywide
Joanne Pollard - director - Five Nine Living
Andrew Wells - partner and non-executive chairman - Allsop Letting & Management
Claer Barrett - personal finance editor - Financial Times (chair)
I will kick off by asking each of you in turn - what is the biggest challenge for the build-to-rent sector?
Joanne: There are three main challenges. Firstly, there’s not enough stock. Everyone wants to pile in from an investment perspective - and if you want to buy assets producing rents, that’s a challenge. Secondly, we’re all learning about this together. There are new practices and we need to find the best ones. And finally, costs. How much of a premium are people prepared to pay?
Jonathan: I agree - the big challenge is where the private rented sector (PRS) sits in the market. What is the premium people will pay to live in a well-run building with amenities? And what about mid-market level?
Graham: PRS is not the right label. What we do is build-to-rent. The private rented sector as a whole includes buy-to-let. We are a segment of PRS but what makes us different is that we are building for long-term rental. We are starting to see what I call ‘live learning’. As this sector started to take off, people talked about what might happen. Now we’ve got people living in buildings. We have data. We can conduct resident surveys. And please note - we have residents, not tenants! We must learn what the customer wants and adapt accordingly.
Andrew: The biggest challenge for the sector is moving away from the property manager’s role being about bricks and mortar. It’s about the resident, the occupier, the customer. The terms ‘landlord’ and ‘tenant’ are feudal terms dating back to medieval times. It’s all very ‘you will do as I say’ and ‘I am superior to you’. But without tenants there would be no rents. If you’ve got happy residents, you will have lower voids and more profitable buildings.
Graham: All too often, residential letting agents regard their clients as being the landlords. It is a big transition to think about the tenants as the customers. In every other business, the customer is king. And renting is something they probably spend more money on than anything else.
So we all agree - build-to-rent is a service industry, in a way that buy-to-let is not. But services and amenities obviously come at a cost - how do you manage that?
Andrew: In valuation terms, a lot of institutional models are based on quite aggressive rental growth predictions. But you have to keep the product fresh to keep the rents moving up. When it comes to amenity space, build costs in London are £250/sq ft. You have to pay for that through enhanced rents or increased occupation. And the viability on so many build-to-rent schemes is thin already - you can’t afford to make an expensive mistake.
Joanne: Amenity space has to have a purpose, a compelling reason for people to use it. You also need to build in flexibility. We are advising on the design of buildings now that won’t be occupied until 2019. Can the amenity space be used for pilates one day and a video conference the next?
Jonathan: We have a development in Wembley that has a gym and a large terrace for residents. People think, ‘I can afford to pay X pounds more, because I don’t have to pay for gym membership any more’. At another development we’re advising on in Canning Town, the developer asked if they should put in a gym. Looking at the rental demographics, the target market works in Canary Wharf. They will likely have corporate gym memberships. These people want to work from home - but not in their own apartments. So providing shared work space makes more sense.
Graham: Lots of comparisons get made with the US build-to-rent market, but we need to take a closer look at buildings in Scandinavia and Germany. Many have no amenities! They are just well-run buildings in good locations. For most developers, amenities are attractive from a marketing viewpoint and resident appeal designed to get people into a building. They might boast to their friends about the cinema room. But will they use it? What keeps people in buildings is good service and how well they are looked after. Having said that, we know from our own research that the number one amenity is external green space - and you can count roof space within that. At the Rehearsal Rooms, a London development we’re managing for M&G, we have a roof terrace with barbecues that residents can use, and allotment boxes.
How else can property managers make their buildings stand out? Is it possible to create a community?
Andrew: People like to talk about the US multi-family model and if it will get replicated here, but the UK has to find its own model. Pizza and cheesy dogs in the lounge at 6pm might work in the US - it won’t work here. In the UK, if you had a development with a courtyard garden, then a gardening club could work. What you cannot have is ‘forced fun’.
Jonathan: Creating a sense of community means different things to different people - it could be having a residents’ cocktail party or an on-site team on the front desk who remember residents by their first names.
Graham: I agree, it should happen organically. Most young people want to make friends but it should be optional - they can opt in if they want to. The building manager is a crucial part of the customer relationship. In some of our buildings we have a concierge; in others they are called the resident services manager. They take ownership of that building.
Joanne: There are huge similarities with the student accommodation sector - and also huge differences. Sometimes students need a shoulder to cry on or a parent to tell them off - as well as a company to manage the building and handle payments. For international students studying a long way from home it’s even more important to be part of a social group and community, plus learn a bit about where they’re living. Creating this community is important for Fresh - we want those students to re-book with us or recommend to their friends. In the Five Nine business, we’ve toned it down a little - nobody wants forced fun. We had a Saturday morning brunch at one of our developments and three international residents discovered none of them had ever been to the Yorkshire Dales before - so they agreed a car share and organised it themselves spontaneously.
How are property managers using technology to manage buildings - and relationships with residents?
Graham: We are already looking at dynamic rent modelling. It’s common in the US - it’s a bit like an airline pricing model - but we don’t have anything like enough data to use it in the UK. It basically means the price of any one apartment could change daily. You can look at availability in a given development that week - where is the demand? Is there a waiting list for one-beds - should you dial up the rents on those? And if there are a lot of vacant two-beds, should you reduce the price? None of us really know how it will pan out. But the danger of an airline pricing model is that you make friends with the guy two doors down and find out he’s paying £50 a week less than you.
Andrew: There isn’t quite enough data yet. But if an institutional developer had 500 units in one location you could begin to do this.
Jonathan: At The Cargo Building you can book viewings online, share all your documentation online, plus report maintenance and other issues. It’s all about trying to make life easier rather than replacing the people on the ground who look after the building. There’s a lot of tech out there. We have looked at an app but the problem is if it doesn’t work perfectly, it doesn’t work at all.
Graham: We have invested in smart app technology - the number one thing is communication. Residents use the app to report maintenance issues and book amenities - we are launching a building with M&G this summer where you can book a tennis court. And we can also send push notifications. If there’s a problem with a lift, we can tell people through the app, ‘there’s a problem, it’s being fixed, don’t come home having done a big shop’. It takes the heat out of a situation. Plus, apps can be used to survey residents and capture a lot of data.
Joanne: The old rental model was pretty appalling - an obstacle course of high street letting agents, paying lots of money up front, getting a dirty flat where repairs were not done and having to sort out the phone line and all the utilities yourself. People have been putting up with this but build-to-rent says this is not acceptable. We take on all the difficult stuff.
Andrew: Driving these efficiencies makes it less expensive for the operator.
Graham: The staffing model has a big impact on operating income. The services and design are hotel-esque. But they are not staffed like a hotel would be. It’s a balance - you can make people’s lives easier with good technology and have the touch point of a human being.
Andrew: Traditional property managers are not the right people. We need people from the hospitality sector who can upskill and have good customer service skills. I’m afraid we wouldn’t take out a job advert in Property Week to find them - we’d take one in Hotel & Catering magazine instead!
Joanne: Good customer service means seeing a need before the customer sees it - these are the points of magic. This is why people will pay a premium to live in a build-to-rent building. If you can do things that are unexpected, that’s what they will tell other people about.
How important is it for managers of build-to-rent properties to have a recognisable brand? Are your customers in danger of ‘brand overload’ from the building owner, the building manager and the building name?
Graham: Different operators work in different ways. Moda Living are very focused on their own brand. We set up LIV as a consumer brand in its own right but we also manage buildings for others on a ‘white label’ or unbranded basis. Another way is having the building as the primary brand with a ‘managed by’ sign.
Jonathan: Some developers are prepared to spend a lot of money launching their brand. Essential Living, the developer behind Vantage Point in Archway, took out advertising on tube escalators and London busses to measure the success of the brand launch by the increased traffic to their website. In contrast, our new development in Liverpool is branded as The Cargo Building - it doesn’t say Countrywide.
Andrew: Similarly, with Fizzy Living, it’s all about their brand rather than the building’s name.
Graham: People tend to go by the name of the building. If I say Bridgewater Place in Leeds, you know where it is. People will recognise that they live in a Moda building and this will have real value (they are working very hard on their brand to ensure this) but I think when people talk to their friends they are more likely to refer to the building name ‘Angel Gardens’. We get very involved in the naming of buildings. We came up with name of Rehearsal Rooms because it was close to the site of a former BBC rehearsal studio. We have a test card design within the building - it’s very subtle, you don’t want branded pens and notepads like you have in a hotel. These are people’s homes - you can never forget that.
Watch video interviews with all four panelists here:
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