In the first of a series on the start-ups disrupting the UK property sector, EG talks to Charlie Vaughan-Lee, the 32-year-old entrepreneur taking student housing upmarket.
What’s the best way to stop a group of students from trashing their rented accommodation? Assuming that they won’t is a good place to start.
So says Charlie Vaughan-Lee, the 32-year-old founder and director of Student Cribs. Specifically targeted at properties for second- to fourth-year students, the company specialises in a rare offering – high-end accommodation for a section of society which, historically, has not been deemed responsible enough for such things as flatscreen TVs, mod cons and, horror of horrors, cream-coloured carpets.
But Vaughan-Lee is convinced that it is the provision of these luxury touches and heavy investment in interior refurbishment that encourages better treatment of the space.
And while it has taken him a little longer to persuade his investors to think along the same lines, now they are achieving solid 6.5% annual returns, it has become a far easier sell.
As one of property’s fast-growing disruptors – young, ambitious start-ups with fresh ideas and niche development strategies – Vaughan-Lee has grand plans. As he aims to list Student Cribs as a REIT within the next two years and is set to introduce Professional Cribs, his first proper foray into the London rental market, he talks funding, future growth and Facebook.
Fuelled by frustration
Like many start-ups, Student Cribs was launched back when Vaughan-Lee was part of his own target market, as a reaction to a situation he found himself in first-hand. He set up the company after not being deemed an attractive candidate by agents or landlords for a decent-quality house to rent ?while studying at Bristol university.
“I was frustrated that I couldn’t find a nice place to live because everyone assumed I was going to behave like an animal,” he says in his Notting Hill offices. “So I bought one myself, as well as some on behalf of family friends, did them up to a really high standard and rented them out to my friends for a little more than the market average. But we’re talking £80 a week rather than £70 and instead of a complete dive, you got a newly fitted kitchen and bathroom, furniture that was going to last and not all cheap flatpack stuff.”
It didn’t take long for the business potential to become clear. These first properties were delivering a solid 5% yield for the investors within the first year. Between 2003 and 2006, Vaughan-Lee bought and renovated houses in Exeter and Leeds on behalf of other investors – including Clive Pickford, the former chairman of JLL Europe – before expanding the business in 2006 to take on a further 20 properties across the UK.
In 2010, the group raised its first fund. With £5.5m of equity plus £6m debt from Barclays, the company bought 29 houses in eight cities before raising fund two in 2012. Student Cribs has now invested £29m of the £34m fund – £17m of which is made up of equity from property and finance investors. “We have bought nearly 80 houses,” says Vaughan-Lee. “We are performing above target, generating in excess of 9% gross yield, and in excess of 6% net yield on the properties we have bought, refurbished and let out. We are now looking to raise fund three at the end of this year with a target to raise £30m of equity and the same of debt. The idea is that fund three will be our final stepping stone before we are large enough to list as a REIT. By then, we should have more than £100m of gross assets.”
The interior design of the properties falls into four categories – vintage, industrial, reclaimed and contemporary, depending on the size and shape of the space. The company looks for properties to house between four and 10 people. “Ideally, we like more than six, as the more people you have in, the better the yield,” says Vaughan-Lee. “We like a ratio of three beds per communal area. And all of our properties meet a core criterion – that there is room for every member of the house to sit around a table at one time to eat together. We don’t want any of our tenants to have to eat off their knees.”
Benefit of the doubt
If there were ever any doubts in the minds of his investors that channelling funds into high-end accommodation for students was unlikely to pay off, it seems they have been largely put to rest for now thanks to successful returns and rapid growth. This, twinned with the huge potential to grow in this market, makes for a compelling business case. “There are 1.5m students in the UK, discounting those in their first year,” says Vaughan-Lee. “If there are, say, five people per house, that’s 300,000 houses in the UK that students are living in. We have 100 and we are aiming to have 1,000 in the next three years.
“And our approach really does seem to work. We give students the benefit of the doubt and what we have found, time and again since we launched, is that if you give them a nice place to start with, they will take better care of it. And these are people who are optionally paying a bit more for something better, which means they are most likely pretty aspirational.”
But there is a back-up, particularly when it comes to Student Cribs tenants’ behaviour in relation to their neighbours. The company is working with universities to manage students who behave particularly badly or in a way that affects neighbours. “We have come up with a system with some of the universities whereby if students are being exceptionally rowdy, this could jeopardise their academic progress if they don’t change their behaviour,” he says.
Facebook friends
And there have been other challenges to overcome. One of the biggest has been getting hold of a customer base that operates at unusual times of the day and is not known for its powers of communication. “Students aren’t treated like customers by the private rented sector,” says Vaughan-Lee. “Which is mad because second-, third- and fourth-year students usually live in houses. They should be treated like customers, but to do that, we had to think laterally.”
The answer? Facebook. “If you walk into any student house and, actually, any lecture hall, you are instantly hit by the cornflower blue shining from most phone and iPad screens,” says Vaughan-Lee. “Facebook has been revolutionary for us in terms of marketing our properties and staying in contact with our tenants. It’s their primary form of contact with the outside world. This is how they communicate.”
Student Cribs not only markets every new property on Facebook – this year alone the company generated 260m impressions of its logo, generating 150,000 clicks through to its site – it uses private groups to manage each one. “Each member of the house will be on the group, plus one or two members of our management team,” he says. “So if they have any problems, they can communicate by their preferred method. And then, whatever needs doing, people can see it has been done or at least communicated to us.
“Tenants can upload a photo of the issue, everyone else can see it and then, when work has been done by a contractor, we can report back. And crucially we can see when people have read the messages, so we know whether or not information is getting through.”
Student Cribs also used Facebook to let all its properties by auction for one year, just to make sure it was pitching at the right level. “In 2012, we were worried we were under-letting, so we had an open day in each city for 50 houses across the country,” says Vaughan-Lee. “We invited students via Facebook to come and look around the properties in groups and we gave them 24 hours to put in a sealed bid. It delivered a 20% increase in rents year on year. We haven’t done it again because we don’t want to be that aggressive every year. But it helped us identify the right market price in the first instance.”
Professional property
What’s next? The group will continue to expand its student business, looking at properties in Southampton and Plymouth and a number of northern university towns, such as Sheffield, aiming to become the biggest provider of bed spaces in the second- and third-year student accommodation market by 2017.
Vaughan-Lee is also looking to launch his new venture, Professional Cribs. “We will launch this fund within the next few months,” he says. “It will be aimed at high-net worth investors with a minimum investment of £500,000. We will buy houses in areas close to Crossrail sites that are now a 40 to 60-minute commute into Liverpool Street, such as Acton, Ealing, Stratford, Woolwich.
“Effectively, we will be offering the same kind of product we offer to students, but in London for people once they have graduated and are looking to move.
“From an investor perspective, this is a capital growth rather than a yield investment. The two major capital growth drivers will be the central London growth and ripple effect, then Crossrail growth. We are looking at buying family houses rather than flats. The plan is to buy the stock now and let it to young professional groups. Then, at the end of the life of this seven-year fund, we’ll start selling to families once the Crossrail sites are up and running and the commute into Liverpool Street is 20 minutes rather than 50.”
Disruption and discomfort
Vaughan-Lee has certainly come a long way since being made to feel like “an animal” by the estate agents and landlords of Bristol, who first inspired him to set up on his own and do things differently – to disrupt, a term he embraces wholeheartedly. “Where markets need change, there will always be a level of discomfort among the original suppliers,” he says. “But this market needed to change – and that’s why we got on and changed it.”
Could you be Disruptor of the Year 2014?
One of the stand-out categories in this year’s inaugural MIPIM UK/Estates Gazette Awards is the Disruptor Award. This award will celebrate the individual – from the public or private sector – who has made the biggest difference to the urban fabric of the UK.
It is a special award made by the EG editorial team and is based on nominations from readers. We are looking to celebrate innovation, determination and impact; in short, people like Charlie Vaughan-Lee.
If you know someone who you believe to be worthy of this award, send your nomination to Rebecca.Kent@estatesgazette.com
Click here for more information about the MIPIM UK Awards.
Emily.Wright@estatesgazette.com
