Earlier this month, we hosted our first ever roundtable on build-to-rent, bringing together leading investors, developers, and consultants in this emerging sector.
After years of discussion, the first developments have opened their doors and residents are moving in. Some £50bn of institutional capital is trying to enter the market, and there are over 80,000 build-to-rent homes either completed or in the pipeline according to the British Property Federation.
The government’s housing white paper saw a welcome shift from the focus on owner-occupation that marked the Cameron-Osborne years, with the realisation there is a growing army of renters to cater to and whose needs are currently not being met by the traditional private rented sector.
But as build-to-rent grows and matures, it will face new obstacles and challenges. Speaking with our roundtable of experts, we identified five key areas of risk and potential solutions.
With the housing white paper hot off the press, politics dominated the first part of the discussion. Participants largely welcomed amending the National Planning Policy Framework to force councils to proactively plan for new homes for rent, as well as plans to give build-to-rent its own affordable housing classification.
But some struck a note of caution. They felt government intervention is what killed off the institutional rental market last time, and calls for rent controls may grow louder and louder, especially if renting comes to displace homeownership completely.
With billions in capital already deployed and more waiting in the wings, it is clear that, to many investors, the case for build-to-rent has been made. The rental market’s fundamentals – a clear demand-supply imbalance, particularly of high-quality stock – and broader socio-economic trends – a shift towards renting and flexibility in work – make a compelling argument. And as many at our roundtable noted, people have been building apartments to rent since the Roman times.
But the lack of concrete data and novel nature of many of the products led to hesitancy in some quarters, and doubts over whether some of the world’s biggest institutions would throw their full weight behind build-to-rent.
Pension funds and insurers may have owned vast swathes of rental housing stock at the turn of the 20th century, but many of the investors moving into build-to-rent lack in-depth experience of owning and managing consumer-facing assets. Participants were in agreement the last thing you wanted was to be on the front page of a paper for an incident you could have easily prevented.
Establishing a strong brand identity, whether that was across a portfolio or specific to each individual scheme, was seen as key. But what everyone agreed to is that the best way to have happy customers was to ensure the quality of build and service you provide.
In terms of loss of future rental income following losses during the construction phase, traditional insurance products such as delay in start-up are understood by developers, however are not all-encompassing, and further innovative risk transfer solutions from insurers would be welcome. Attendees also noted wider construction-industry trends such as the current skills shortage and the potential impact on workforce supply post-Brexit.
Modular and off-site construction, which has been embraced by Essential Living and Legal & General, was accepted as a potential solution. Beyond a reduced reliance on labour, many of the other benefits were highlighted, including:
- reduced time on-site, meaning rent can be collected quicker,
- improved building performance through increased energy efficiency, thereby boosting net operating income
But delivering residential through modular at the scale some participants were suggesting would require a fundamental rethink about housing delivery. The change in construction risk profile—specifically the increased reliance on supply chain and associated risks—was also recognised by attendees and potential risk transfer solutions discussed.
With the rise of renting—particularly among millennials, being part attributed to the emergence of platforms like Netflix, Spotify and Uber—it is unsurprising tech crept into the conversation. But while many were excited about the opportunities, such as apps connecting residents to each other and the building they lived in, few had considered the potential risks.
From smart fridges to the Wi-Fi itself, the increasingly digitised and connected world we live in has created new vulnerabilities to consider. And the pace of technological change meant buildings could become increasingly obsolete, and there was broad agreement future-proofing developments was essential.
While the roundtable left us more aware of the risks created by technology, the participants were still more excited from the potential rewards this emerging sector could bring.
David Wigley has been the Divisional Director of Willis Towers Watson’s Real Estate Practice, based in the U.K., since 2016. Prior to this, he worked with our HNW Private Clients practice.