9 minute read
BUILD TO RENT: How big is the threat to BTL?
Millions of institutional pounds are being funnelled into the nascent but growing build to rent sector. Could this be the beginning of the end for the smaller landlord or property business?
By Alex Daley
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It seems every month a new big player announces a move into the Build To Rent (BTR) space. In fact, when you sit down and look at who wants a part in the UK property market, we’re talking about some serious names.
But how worried should we, as smaller landlords and property businesses, be?
We took a look at what’s happening and sought advice from Stephen Riley from RM investments (pictured above, Instagram @r.m.homes) to help answer that question and provide commentary throughout, in particular on how we can compete. Stephen’s background is starting, growing and selling estate agencies alongside his property business. With properties as far and wide as Newcastle, London and Wales, he is well-placed to gauge the threat from BTR.
Stephen Riley, RM investments
FIRSTLY, WHAT IS BUILD TO RENT?
As the name suggests, BTR properties are properties built specifically with the intention of being rented out, unlike your classic two-bed terrace house built for long-term ownership.
A lot of the time, these aren’t your standard block of apartments we’re talking about, developers are keen to create mini-communities, with communal rooms, pool tables, gaming consoles, work-fromhome spaces, concierge and in some cases, even hairdressers.
Ultimately, that amenity level within your building is something completely different to the service most landlords offer.
SO WHO’S TAKING A BITE OF THE PIE?
- Lloyds Banking Group PLC - 50,000 homes in the next ten years, with 10,000 by 2025
- Goldman Sachs Group Inc - buying nearly 1,000 homes in Northwest England
- Legal and General has over 5,000 apartments in planning development or up and running
In fact, Savills expect that once the market has matured, B2R could make up one-third of the rental market. A third!
Okay, now that got your attention.
A study by Dataloft comparing against the wider private rental sector found that BTR had a similar customer profile - looking at age, profession, affordability and income.
“BTR residents’ incomes are broadly similar to those in the wider private sector – in the urban BTR sample, 32 per cent of residents earn between £19,000 and £32,000 per year and in the full private rental sector it is 37 per cent,” Dataloft stated.
The report also stated, “What’s more, BTR doesn’t just provide residents with a home for their monthly rent payment – 78 per cent of schemes in the urban data had a roof terrace or shared garden, 73 per cent a have a concierge, 73 per cent have social events, 69 per cent have parcel acceptance and storage, and 61 per cent have a coworking space.”
But we’re nowhere near that maturity figure that Savills foresees, and whilst they didn’t say how long until they felt it would get there, what we can say is it’s not something that’s going to happen overnight. Although, judging by the speed at which some of these places are getting built, it may not be forever and a day.
IS BTR A BIG THREAT?
So is it all over for landlords? Should we pack up, cash in and find something else to do?
Well, it’s perhaps not quite time for that. Let’s not forget at the core of everything remains the fundamentals of supply and demand. Which is a balance that’s yet to settle, hence the recent rental increases. And this mass exodus of landlords we keep hearing about (although actual figures are proving it has been somewhat overstated) isn’t exactly going to help settle that, is it?
“It’s not doom and gloom,” Riley says, “we can all have a piece of the pie.”
The point is, with so much demand in the market, you’d struggle to say BTR is going to destroy the private rental sector. At least not anytime soon. But that’s not to say it won’t impact it. New buildings, work-from-home areas, package acceptance and storage, there’s no way that this becoming more common won’t impact the expectations of renters. Especially if price points aren’t too far off the private rental sector.
Who will get hit first? Well, the likely case is the lower standard rental properties with landlords who aren’t all that bothered about providing a good quality service. Who, and let’s face it, if you’re this deep into a magazine instead of turning off all your devices to avoid the calls from your tenants saying the house is falling apart, probably isn’t you. And if they do take a hit, that’s possibly not a bad thing. In fact, it’s very possible, the standard will increase across the board. As Riley discusses below.
The large institutions will have their reputation at stake here, so we shouldn’t bank on slipping standards from them.
HOW TO COMBAT THE BTR THREAT?
There’s no shocking revelation here, it’s all simple stuff. If we are providing a good quality service, BTR isn’t, for many of us, a large threat, and won’t be anytime soon.
Riley says: “Raising the standard of units in the area, I see that as a positive, some may view that as a negative to their situation if they don’t have the funds… The landlord that doesn’t want to keep up may be lost. Those that invest, insulate their properties and offer a more personal service will survive and probably thrive...The landlords who aren’t adaptable to the market changing will fall away.”
We do though, need to be aware of the market, what renters can get elsewhere and for what money. And that requires some objectivity, which can be hard. Especially when you’ve spent time and money on a place. If though, a brand new block appears around the corner, with all the bells and whistles at the same price point, it may be that you need to adjust to keep competitive.
“Small landlords can compete by differentiating themselves and offering a more personal service, that could be more flexible terms, BTRs are often longer contracts, whereas landlords can go shorter which may suit others better… Landlords can be more flexible. BTR companies will have minimums that are set, whereas landlords can keep flexible. There’s a bit of a cat and mouse game that can be played,” Riley explains.
Riley, whose portfolio includes a number of HMOs describes a number of the steps he and his team take to try to build the same community BTRs have in order to keep competitive.
“We try to build a community within the house, whether that’s pizza Fridays or other things. We’re trying to put that spirit into the house. If it takes it takes, if it doesn’t that’s fine.”
What’s clear is BTR is here to stay, but so is traditional landlording, so roll those sleeves up and keeping working on your service.
subject to different market forces, which was clear throughout the pandemic when most tenants were craving outdoor space.
It is also worth considering the differences between old and new properties and the benefits and risks they could bring to your portfolio. For example, new builds can be extremely energy-efficient, meet EPC regulations and require less maintenance, while older properties have desirable period features that tenants also love.
OPTION 3: DIVERSIFY - AREAS
By investing in just one area, your portfolio’s performance is tied to the highs and lows of that area.
It is also important to note that the typical property cycle can pan out at different times in different locations. So, while one area may recover quickly, another may take longer.
By spreading your portfolio wisely across different locations, you can ensure that at least one part of your portfolio is always growing to offset any under-performing areas.
You can also increase your chances of investing in a ‘hotspot’ simply by investing in more areas. Some locations are strong on rental income, and others are more focused on capital growth.
The downside to many landlords looking to diversify into different areas is that the right investment will oftentimes be in a different area from where they live. But the benefits of diversification outweigh the risks if you can look beyond the initial hassle of traveling to view properties and manage a property remotely.
OPTION 4: DIVERSIFY - TENANT TYPES
By diversifying property types and areas, you’ll almost certainly diversify in tenant type, which can greatly reduce your risk of market forces.
For example, by investing in different areas at different property values, you’re unlikely to have many tenants working for one employer or in one industry that could be subject to market forces beyond your control.
Families typically rent a house in urban or rural areas, while young people and professionals typically rent a city centre apartment. There is also another tenant you should consider as they are unlikely to be affected by market changes – tenants on Universal Credit. Some landlords prefer not to rent to people receiving benefits because of the challenges that tend to come with these types of tenants. However, benefit income is ‘recession-proof’, and these properties can be extremely beneficial to your portfolio during a downturn.
READY TO DIVERSIFY YOUR PORTFOLIO?
Diversification is all about protecting your portfolio from external shocks. While no portfolio can be entirely bulletproof, by diversifying as much as possible, you can minimise the impact of any negative market changes.
The best recession-proof buy-to-let portfolio is one that consists of a variety of property types, tenant types, areas and strategies. That way, you will most likely minimise your voids, keep your portfolio generating a healthy cashflow each month, and benefit from longterm capital growth.
