COMMENT Build-to-rent schemes are getting bigger. Figures from EG Radius show the average scheme size has risen to almost 400 homes, up from 100 in the early days. With established funds and developers concentrating on larger schemes, the door is open for more diverse investors to join the market at the smaller end of the scale.
Generally, smaller projects of fewer than 100 homes mean lower barriers to entry and reduced reputational risk for new market players. They require less upfront capital and lower management costs, while offering faster let-up rates and returns. Small sites also typically see less competition from a land and acquisitions perspective. For investors considering reducing their exposure in other markets (particularly as the retail and offices sectors are resized by Covid-19) there is a clear opportunity to dip a toe in the BTR water.
This is a move that we should welcome. Increasing diversity and competition can be healthy, driving up standards and encouraging new ways of doing things. Smaller BTR schemes also have a role to play in wider urban regeneration – helping to breathe new life and bring footfall into town and city centres that have seen shops and workplaces close during the pandemic.
There are benefits for renters too. As more people make an active choice to rent, smaller schemes can expand BTR’s geographical reach and offer. So where are the development opportunities and what’s needed to make them a success?
Looking to the regions
Regional urban centres, such as market towns and traditional commuter hubs, are prime targets for smaller developments. High streets in many of these locations have been hit by the continued growth of online shopping, opening the way for the conversion of vacant units and over-retail development as brands with significant legacy estates look to reduce floorplates. New permitted development rights should encourage these schemes, with recent updates in particular limiting rights to projects up to 1,500 sq m (16,146 sq ft) in size.
BTR development in market or fringe towns makes sense from a lifestyle point of view too. Suggestions of a mass exodus from cities as people seek more room and green space are overstated, but it’s true that many people are looking for a better work-life balance, particularly as flexible working becomes the norm.
Towns in more rural settings can fulfil this ideal, while still offering good transport links to employment centres. I’m thinking of places such as Banbury, with its easy access to the Cotswolds and links to Birmingham and Oxford. Another example would be Taunton, with its connections to Bristol and Exeter and direct rail service to London.
Unless there are site constraints, such as a railway or a river close by, then build costs should be competitive in these areas. For investors that may still need convincing, partnering with housebuilders to develop smaller parcels of single-family houses can be a good way to test market demand and iron out operational issues.
Residents rule
Understanding the target renter is key to making these developments work. We’re likely to see continued appeal among young professionals and graduates who, after losing a year of socialising, will be keen to enjoy the amenities and social networks that urban areas offer.
Smaller blocks should allow access for a wider demographic thanks to their lower running costs, which can be passed on in rental rates – they typically don’t have lifts, for example, which can be a big contributor to management fees. At the other end of the age range are divorced renters and retirees who want fun on their doorsteps and shops, restaurants and bars within easy reach.
Better use of technology can support a positive customer experience while also helping to keep operational costs within a reasonable range for projects – through a virtual concierge, for example. Collecting data through these services will also help asset owners and their managing partners to run schemes efficiently and to respond to customers’ needs.
We still have a way to go to change perceptions of renting in the UK, but it is becoming more of a conscious lifestyle option for some people, rather than a financial necessity, and it’s important that the BTR offer continues to keep pace. As the market matures, there is room for an influx of new developers and investors. That can only be a good thing for consumers and the sector – broadening the range of rental choice and continuing to inject dynamism into this ever-evolving sector.
Katherine Rose is director of BTR and PRS at Navana Property Group
