Over the course of several editions we will be discussing our experiences of these markets and products as well as some of the common (and not so common) issues which may be faced in structuring, operating and, most importantly, protecting the value of these investments.
PRS and BTR are some of the most widely used terms in the real estate development and investment sphere at the moment (and for good reason). Like many times before, the private sector is finding a way of addressing a market need which in this instance is the ongoing lack of quality housing. The solution is showing a way to increase the number of homes available with a smaller footprint (in terms of space and energy – see later editions) and in larger numbers than most typical housing estates. It also typically involves providing plenty of amenities on the doorstep, making these schemes a destination in themselves, which is something very different to other types of residential development.
It's important to make sure we're talking about the same thing, as the terms 'PRS' and 'BTR' are often used interchangeably. PRS is the market which includes all types of residential occupation, except for social housing and owner-occupied (and squatting…). BTR, on the other hand, is a specific product which has been designed for the purpose of being operated on a mass-letting basis.
Most of what we will be discussing in these articles centres around BTR, with commentary on how that fits in with and influences more generally the PRS and other markets.
The Market
While the PRS market has been around for much longer, BTR is still in its relative infancy. The concept has been proven and there is (at the time of writing) seemingly plenty of cash available to fund a lot more than is currently being built. However, we're still in that period where even the earliest adopters are only a few years into their investment cycles and it's still to be decided what the optimum structure is in each scenario.
Despite the learning curve continuing to educate, the upsides for investors are many, but to reel off a few:
- The 'housing crisis' doesn't appear to be going away any time soon.Even in a downturn, fewer people being able to buy a home should push more into rental, helpfully filling some voids.
- There is still an undersupply of the product (even if the prime sites are dwindling) so anyone bringing a product to the market in the next couple of years won't have much to worry about in terms of competition.Speculative investment is therefore more attractive and less risky than usual.
- Institutional funds are so keen to get their hands on BTR assets that they are often being traded over before a portfolio can even be established.
On the other hand, the bad news is that there are some issues preventing the market from galloping away as it would have otherwise, for example:
- We are seeing that land valuations in London are too over-inflated which is restricting possible returns and therefore investment.It is falling back into the hands of the local authorities to sponsor specific deals which will inevitably slow the pipeline down.
- The opportunities in the other main cities are there but fewer and the problems of land-banking is having a similar effect in slowing down the pipeline.
- The current (at the time of writing) sentiment is that the deals being offered are over-valued.This doesn't necessarily have to kill a deal but the parties involved are, in our experience, having to be shrewd in coming up with more flexible ways of delivering value.
The Product
There is a great deal of excitement about how the BTR product is shaping up, with developments in the pipeline boasting some very attractive features (e.g. on-site cinema screens, gyms, swimming pools etc). These are the kinds of facilities you would have previously associated with the houses of the high-wealth and, while tenants of BTR schemes will have to share, it's still a step up from having nothing or having to traipse or drive across town to get to what you need.
You would have to expect though that the top of the market isn't going to be for everyone; there will inevitably be more usual developments with minimal additional facilities. After all, too much of a good thing may do you harm. Competition will necessarily drive innovation but we're a long way off being able to see what effect a crowded market may have – it's hard to picture at this point but could it even be possible to see a race to the bottom on rents to maintain occupancy rates?
Similarities have to be drawn to the other end of the age range. In reading this article so far, I'd expect most people to be picturing the atypical 'Millennial' or 'Generation X' tenant. However, and to use one too many buzz-words, 'generation rent' has been shown to have a higher age average than initially thought. In the same vein, retirement villages are following a similar path, providing much more in the way of facilities, widening the appeal and moving away from an historically clinical outlook. Will we start to see any cross-over of these products in order to maximise the pool of potential tenants?
Sign-off
Our next article will focus on the political landscape and on some examples of areas where extra care is needed.
DWF in an international legal business, acting for a large number of PRS and BTR investors and developers on schemes and assets all over the UK. Please feel free to speak to one of our real estate specialists below for more information.
