To furnish or not to furnish?

Introduction

New research commissioned by David Phillips into the UK property market has revealed for the first time the effect of furnishing on yields and investment returns. It is the first nationwide study by postcode of the impact of furnishing rental properties or not on different markets.

Our roundtable panel recently met to discuss topics including:

• The relative merits of furnished versus unfurnished properties
• How tenants’ needs are driving change in different parts of the rental sector
• The impact of furnishing on voids

Liz Hamson: Thanks very much. I was slightly cynical about this research when I first heard about it. A furnishing company talking about the possible advantages of furnishing. In fact, I haven’t seen anything as comprehensive as this before. The almost street-by-street detail is quite fascinating. Nick, did you want to go into a bit more detail?

Nicholas Gill: Sure. Thank you, Liz. We’ve spent some time developing this data. The first thing to say is that Britain is a 69% furnished market and 31% unfurnished. We’ve never previously been able to answer that, other than by talking about apocryphal evidence. The second thing is that, when you work through the numbers, you can see within the M25, for example, there is on average a 16% uplift through furnishing. Which we think, in a world driven by decimal points of yield, is quite a big number.

What that all translates into is, looking at the UK lettings market in 2015, if the market had been furnished optimally, landlords and investors would’ve seen a £300m increase in rent.

The other side of our business, which is less quantitative, is [advising on] how to furnish appropriately. If you’re trying to achieve £2,500 a week in the Docklands, you need to furnish at a certain level. The opposite is also true - you can over-furnish and spend too much.

James Davis: Another factor in maximising your rent and minimising your voids is the images used online. Tenant behaviour has changed in the last few years. They are doing their due diligence online. They’re not going around seeing 15 places, so your place has got to stand out online over all the others. It is very much down to how it looks in those images. Most agents don’t do a particularly good job here.

Martin Skinner: I think it depends what customer you want, as well. The best customers are going to be extremely busy. Make it really obvious how fantastic the place is going to be. Put everything in there, make sure the furniture’s great and that it’s dressed beautifully. It’s got fantastic pictures, and therefore it stands out from the competition. Then you collect the best people.

Debra Yudolph: For us, it’s important to make sure the furniture lasts. Wifi is also essential. It really is becoming the key utility. It needs to be working on day one, and it needs to be fast.

Nik Madan: We all need wifi, probably more than we need water.

Andrew Pratt: You can’t rent out a student accommodation unit without wifi in it. That’s been said for many years. Now it’s also a question of what other smart features are added on to that, such as tenants expecting to put the heating on before they get home. That’s going to develop hugely over the next few years.

James Scott: Looking at the demographic trends over the next 10 years, more people are going to rent and they are going to need furnished accommodation. The emerging demographic is going to be one that doesn’t have furniture and they are moving into somewhere unfurnished - that’s a capital cost they are going to be hit with up front, which they probably can’t afford. That trend is important over the next 10 years if you are looking at yields. More people will want and need furnished.

MS: Is there not a fairly clear separation between young singletons or couples and families here? We’re selling apartments in Epsom, and it’s very much a family location. Whereas Canary Wharf is very much a city centre-style location. People don’t have the time to furnish in a city-centre location.

NG: We are seeing the impact of build-to-rent schemes, as they come to market up to 2018. How zones three, four and five will change from 70% unfurnished and 30% furnished…the generation who have come from the student accommodation market that will resonate, with concierge services and so on, that may well change that perception in those marketplaces.

LH: It already is, isn’t it? I think that’s what’s showing in the data: it’s moving out to zones two and three, where you’ve got these big schemes, and it’s making everyone raise their games.

Sylvana Young: That’s happening to us in the Village. We’ve furnished 85% of 1,500 units. What we’re finding is we get exactly the same rent for the furnished and the unfurnished, but it’s appealing to a different market - the families and the older, probably 50-plus market. Whereas the other market, the market that’s coming out of the student sector, it’s your sharers that are wanting furniture, but they’re paying the same rents.

LH: So you could go too far down the must-furnish road, potentially?

David Morris: Certainly from a PRS/institutional investor perspective, I think that’s correct. The data we’ve seen on the Village is actually very similar to that 80%/20% split. I think where this tool and this data are really useful is where you’ve got a couple of properties in Epsom. Then this is going to help you formulate what to do.

MS: This gives you a lot of data about what the trends are in an area. It’s a really helpful steer on formulating your opinion about what you should be doing. Then it’s a question of how far do you go, if it makes sense to go the furnished route.

LH: I’m interested that you furnished 85%. How did you come to that figure because that seems quite high to go in at?

SY: It was built up over time, so it was an element of listening to where the demand was. There is a lesser demand for unfurnished, but the demand is still there. Those proportions are what works for us in the Village.

LH: Is that starting to change? And are we also seeing higher expectations from people that come out of nicer student accommodation now wanting more furnished?

SY: The expectations of people coming out of student accommodation is definitely having an impact because the level of student accommodation that you get now is, I think, higher than a lot of the PRS.

NM: I think that’s a definite trend. When I first started working in the lettings business 18 or 20 years ago, it was very much a landlord-tenant relationship and the tenants were jolly lucky to get what they were given. It’s a service-provider/customer relationship now. In order to keep that customer, you almost need to do anything because, as these figures show, the payback is year three to four.

DM: I think you also think of the cost of acquiring a tenant. Can you get them to stay for 36 months rather than moving every year?

NM: I think flexibility is the key here. As a provider of rental accommodation, shouldn’t one listen to a customer? If they want something furnished, the ability to come to someone like David Phillips, and just plop furniture in, is an amazing option to have.

MS: You can always take furniture out if they don’t want it.

DY: You wouldn’t open a shop and only sell size-eight clothes, and hope to sell out. In some places, the rent will go up, in other places clearly it won’t, but it is about ‘let-ability’, it is about reducing your voids and it is about length of stay. If we had that data, then it would be much easier to have a good rational discussion with investors about the amount of furniture.

I also think there will be a lot more of the professional, larger landlords looking at what to do with the furniture. One of the options for tenants is that you have the furniture, and you take it with you into your shared-ownership place, for example, so furniture will become an incentive. Through paying rent, you own the furniture, and then you can take it with you.

LH: Sort of hire purchase, just like TVs?

DY: Yes, because at the end of the tenancy, it’s no use to the landlord anyway. I think that furniture will be used more as an incentive. Not just to increase the rent, but to encourage a different sort of tenant to see their property in a different way.

DM: People would maybe look after that furniture better, if it’s theirs at the end of it.

DY: Absolutely. I think it will become part of a different way of thinking about long-term tenancies, and people having a bit more of a vested interest.

LH: Do you foresee a time when the tenant will be able to actually participate in choosing?

DY: We are looking at that at Canary Wharf. Perhaps you choose it from an online shop. There’s a market for people who are really busy, who still want to make a statement about their home. They don’t necessarily want to hike around Ikea. I mean, that’s what happens in Sweden. They have showrooms at the bottom of the rental building.

LH: That’s increasingly going to become the case, isn’t it, if rental becomes the norm?

MS: I would say if there’s a cost associated with buying that furniture, then that probably puts it more into the bracket for someone that’s actually buying a home, rather than someone that’s renting one. I think [renting furniture] is just a given for young professionals, who, remember, run all the way up to about 40.

JS: It’s a lower up-front capital cost to them. It gives them the flexibility to change their mind or mood, and it means they don’t have to carry it around. People don’t want to be tied down, so don’t try to force that upon them.

Another thing we are seeing among the generation we’re targeting is that space has become far less important. All they want is for their living space to be convenient. They want a good user experience. People rent our units because it’s straightforward and it’s convenient. The shared space and the lifestyle are increasingly important.

MS: You can have a smaller private space and a bigger shared space, so it’s win-win. The developer, or landlord, gets a higher rent overall. The user gets a better experience because they have more space, actually. They just share it. They want to share it.

JS: People aren’t asking, ‘What’s the square-footage?’, and comparing it against other properties. They are more interested in what the wifi’s like.

MS: Rightmove doesn’t show square-footage, or price per square foot, because the consumer hasn’t requested it. It does show internet speed. It’s about budget, and then they will select from what they can afford by how beautiful it is, and how convenient it’s likely to be for them.

JS: I think there are other issues for the portals to address. Something like 45%-50% of all tenants have a pet of some description but you can’t search by pets. That’s half the tenant market. They are quite limiting, in terms of what you can search by.

LH: It’s also the case, isn’t it, that as they are having to rent rather than buy, they expect their rental properties to be really damn nice?

JS: The average tenant in the UK has moved on from, ‘I just want a two-bed, and I’ll take whatever’s available’. There is stuff that they are not actively looking for but will pay for if it is presented in a nice way.

MS: You could almost categorise that as needs, expectations and desires, I think. Steve Jobs said: ‘It’s not the consumer’s job to tell me what they want. It’s my job to tell them what they want.’ That’s all about working very hard to provide something that’s exceptional, and also exceptionally easy to use.

Jennie Fojtik: ‘Easy’ is the key word. People want the process to be easy. That’s definitely what we’ve noticed and furniture is definitely part of that. The ease of being able to offer furnished or unfurnished. They also want furniture that isn’t going to fall apart in six months. It is about quality as well.

LH: How high-spec do you have to go these days? It’s not just about putting Ikea furniture in any more, is it?

JF: It’s about furnishing to the right standard for the right market. Ultimately, we’re in the lettings business. We have to sell that unit not once, but three, four and five times. It isn’t just about the initial marketing shops, because they’re always going to look fantastic if you’ve got the right furniture. It’s how it looks after two years - you’ve got to manage your churn.

Nisha Kerai: Yes, it’s the re-let that is tricky. When is that point where we should re-furnish, replenish and upgrade the furniture so we retain the premium on the rent?

JF: We’ve seen it in Wembley. Without a doubt, you do see the badly furnished unit getting left behind as rental grows.

MS: There is a virtuous circle to this, as well. If you have the most consumers competing to take your unit, they will tend to look after it better. Therefore, you’ll have lower maintenance costs, you’ll retain value in the property and you’ll have stronger pricing power. If you only turn, let’s say, 5% or 10% of your units over the year, competition drives up the value of that unit. That drives up your renewal prices as well. It benefits the whole of your scheme.

JS: In my mind, the PRS needs to become more sophisticated and more business-like in how we operate, putting the customer at the heart of what we do and also trying to understand what premiums they will pay for. There are things people will pay for even if they don’t know it at the moment.

NG: Something really interesting for us to work on is this whole idea of furniture accompanying the journey of a tenant. There is a straight rent-from model, and then something that we call a ‘major service’ model, which picks up elements of the after-care service that we think makes sense particularly for the PRS and large portfolio managers. For example, the first tenants are young, professional sharers with two bedrooms. The second tenants are a young family, who want the second bedroom to be the children’s room, or a study. We would take the furniture away, store it for you and hold it until you want it back again. It’s an asset management solution.

JS: I’ve gone down this road over the last few years, of doing the fully furnished show-home look and it has grown from there. People have walked in and said, ‘I’ll take the lot. The towels, the whole shebang.’ They just take it, straight away.

LH: It’s lifestyle that you’re selling.

JS: Absolutely, they buy into that. They’ll see it on a Friday and everything is done by Monday. Increasingly, I think creating that vision of giving people what they don’t know they want is really important.

JD: One test we did was advertise an apartment unfurnished, and then furnished - all done up with a complete refurb. The furnished images got four times more enquiries than the unfurnished option. There’s the hassle factor. The more someone can relieve that hassle, you’ll go, ‘I’ll take the lot.’

JF: It’s like car financing, isn’t it? You entice your tenants with a new building, asking them to upgrade.

NG: People are moving away from car ownership to lease - property, perhaps, is going a similar way.

LH: I’m keen to explore the differences across the UK as a whole, in the need to furnish or not. What have people noticed who have got national portfolios?

JS: There’s definitely an urban distinction versus rural. We bought a business in Wales last year. Most of that stock goes unfurnished. Whereas a business in Newcastle is all furnished.

DY: An interesting example is Bath, which is majority unfurnished. It is changing because there’s a new market being created in Bath, and also the transport is changing. But we were quite surprised. Bristol, furnished. Bath, unfurnished. We were surprised but it is to do with the maturity of the private rental market and also the number of young professionals that have moved into the area because of work. But I think that if you look at Bath in four years’ time, it will be much more furnished.

AP: It can vary hugely, in a very short distance, frankly. We’ll have 700 units in central Manchester, which we’ll be starting to let in the middle of next year. The most important thing for us is adaptability; if suddenly we recognise that there’s a huge furnished market here, that’s what we’re going to have to do.

JD: Outside London and the South East, let’s not forget there is a huge proportion of landlords out there who still put an index card in a shop window, or use classified ads to find their next tenant. They’ve all heard of Rightmove and you tell them 92% of tenants are looking online, but they just have an issue with getting their credit card out. There’s a huge educational piece, I think, for them.

Ed Grant: I think our data actually shows some of that. You would expect to see the furnished rate in a regenerating area such as Tottenham increasing, but actually in our data, it’s decreasing. We have anecdotal evidence as to why that is, and we think it’s because the tenant demand has increased so much in that area that landlords have simply not needed to get their credit cards out. The local agents are saying, ‘it doesn’t make a difference whether you furnish or not, because they can let anything’, but what our data is saying is that if you did furnish, you could get a significant premium of 17%.

LH: What other hot spots are being noticed around the country?

EG: The really big furnished markets are city centres and university towns and London is a heavy focus. There are only two postcode sectors in the UK top 10, outside London, which are Reading and Headingly.

LH: How about cold spots, where you don’t need to furnish?

EG: Rural areas, or areas where people aren’t commuting into towns. Outside the M25, generally it’s an unfurnished market unless you are creating a market, as we see in Crawley, for example.

LH: What do you think is going to happen in the next three to five years? How is it going to evolve?

JD: The biggest trend we are seeing now is the amount of enquiries we get from people looking on mobile devices. I think 54% of all tenants enquired via mobile devices for their next rental during 2015. That grew threefold and it is going to continue. The size of screens and resolutions are also going to increase. I think within it, we will start to get symbols [on listings] like you do on Facebook to tell you what the broadband status is and so on. I think in the rental market decisions will be made based on images. Tenants probably won’t even do viewings soon.

We’re already seeing in the rental market people only doing three, possibly four viewings. The viewing now is more about confirming what they’ve seen online, meeting the landlord and reassuring themselves that things will get fixed.

DY: In all our research that we’ve done, people do not ask who the landlord is, or whether they have a good track record. M&G has just put some properties on the market in Bath, and it’s the only time I’ve ever seen it where it actually says who the landlord is, and what their policy is to do with their tenants. It’s very difficult to find a [rental] brand that people recognise as a consumer.

I’m not anti-online. I get it - that people start online - but educating people about the quality of the furniture, the quality of the landlord and the fact that the landlord will change the furniture is still quite a long way away.

JD: I think we’re moving to how it works in other sectors, where you want that peace-of-mind factor. That will come into the rental market in time. Who’s behind the property? How long have they owned it for?

MS: The emergence of branding.

LH: The bigger housebuilders are starting to be far more overt about what they represent, and it’s supposed to be a badge of quality. There’s also an opportunity for the smaller landlord to use furnishing to help create a bit of a brand, a bit of trust.

AP: This is why the government wants the institutions to be involved, because there is that backing there.

DY: And it professionalises it.

AP: The concept is fascinating. I think we’ll see more of it because it will give a huge amount of comfort.

DY: Some Cottons research asked: ‘When you chose where to live, was the fact that it was on one of the big estates important?’ The answer was no. But when they asked: ‘Now you’ve lived here for year, is it important?’ They answered: ‘Yes it is.’ I think that there is change happening. Looking for a holiday home, you look at TripAdvisor. If you buy a home from a bad housebuilder, you’d look for a good one next time, wouldn’t you?

JD: You can take things one step further [to gain their trust]. We are throwing the world’s largest house party, for a thousand people, in our building. If they have an amazing party, they’re going to buy into us. They’re going to trust that they’re going to be able to have a good place to rent. Getting the emotion back into buying is a way to differentiate your brand.

LH: It’s the experiential marketing, isn’t it, of which furniture is a part, I guess. I’m conscious of time here so I’d like everyone just to sum up their thoughts on the importance that they think furnishing has going forward. Are we going to see more need for it? Is it going to become more differentiated across the postcodes?

JF: What I’m hearing around the room really is about the need for a flexible approach to unfurnished and furnished. It’s about flexibility, quality and longevity. Possibly what will change, based on some of my learnings from the US, is that we might be refreshing our furniture more quickly in the future.

LH: At what frequencies?

JF: Three to five years is probably the standard, at the moment. So whether that would come down to two to three, I’m not sure.

DY: What’s clear is that there is more than one market and you need to deliver the right product to the consumer. It’s about flexibility, quality and convenience. The other thing I wonder is will furniture be one of the things that builds brand image? Will we get to the point where it will say ‘furnished by David Phillips’, and that says something about the brand - therefore people choose it because they know what to expect.

Dominic Martin: My takeaway is that it’s a brilliant piece of research, a really helpful step in the right direction. The other thing I would love is the software that will allow me to pull the levers to see what’s worth spending, or not spending, and what other factors make a difference, such as car parking or broadband. There are so many other moving parts that are important to a renter.

Karen Williamson: I think my view is that tenants are so much more flexible and are demanding more flexibility. They are more mobile. It’s not just the case of whether they want to live in Manchester or London, but Beijing. It’s about other flexible levers you pull with your prospective residents. Do they want to be part of a community? Are they always working 12 hours a day and then socialising for five hours?

JD: I think the tenant customer has changed a lot over the last few years, and will continue to change dramatically. There’s a massive need for everyone in the rental sector to up their game and to have foresight of what people’s needs are going to be in the next few years. It’s no longer just the four walls, and the fact that it’s got two beds. Buying into a dream is really important. Forecasting that using data like this will give all of us a competitive edge and make sure our property stands out for the right reasons over all others. It may be you don’t need to furnish, but you’ve got to understand the market you operate in and understand what its needs will be in the coming years.

AP: The availability of data like this is so important. I hope that everyone can share that information in future because it gives you a guide, as an investor or owner, as to where you could end up. You’re going to find out really quickly what you have to produce in these units. The most important thing for investors is very high levels of occupancy.

LH: This does seem to be a good way of minimising voids, doesn’t it?

AP: Absolutely right. I think this type of data is really useful as we develop scale. I think it’s terrific research that gives a benchmark for what the major investors are going to be doing as build-to-rent increases.

Roxanna Zea: I absolutely love the research. As an agent, this is really good for landlord education. One of the questions we ask them is: ‘When was the last time you put in new furniture?’ The answer is anywhere between six and 10 years. It’s up to us to convince landlords to spend the money.

DM: We need to remember that if you’re outside London, there’s a big chunk of the market that isn’t premium, isn’t top end. I’d also be very interested to see what my furnishings do to my void rate. If I can reduce that by a percentage point, that makes a big difference on my yield and it makes a big difference to my investors. That’s where I would like to see this research going.

JD: One of the interesting pieces about this research might be using it as an indicator for where young professional renters are moving to. Seeing, for example, there’s an area that doesn’t necessarily have a strong PRS market, but where there’s a huge demand for furnished accommodation, that may well suggest that is quite a good place to then build PRS for young professionals.

NK: I think the general theme I picked up on is the need for flexibility. Investors need to be much more transparent about the things they’re providing, so that we can start educating our customers to understand that you do deserve good furniture, good wifi, good service and good maintenance that is done on time.

NM: For me, it’s about educating that client base to improve the quality of the product that they are providing. From town to town, from landlord to landlord, that’s an extremely difficult thing to do. There is a reluctance to spend money among landlords. It’s a long-term exercise especially when you go out of the urban areas. The tool is a useful part of that education process.

MS: I think it’s a great piece of research that shows the scale of the opportunity and the fact that there’s quite a lot more that we could do. I also think social media, technology and innovation are going to bring a lot of change in the years ahead.

LH: Do you think the £300m that was mentioned at the beginning was probably just the tip of the iceberg?

MS: I do. Residential, in the UK, is a six-trillion-pound sector. It’s enormous. In every home you need furniture, whether you buy it or rent it, and whether it’s provided by the landlord, or the landlord facilitates the consumer buying it or renting it.

NG: Thank you for your comments about the research. We’re very conscious of the fact that it’s a first step. It’s obvious that voids are the missing piece because that’s the major assumptive element in this otherwise quantitatively-based document. It seems to me that the level of service provision is changing fundamentally, be it the impact of the built-to-rent sector, the impact of online or just the demographic shift towards generation rent. This is a really provocative set of reflections to take away.

LH: Thank you very much indeed for everyone’s input. It’s really fascinating data.

David Phillips’ Furnished Index Calculator can be found here.