Bryan Cave Leighton Paisner. The elephants in the Build to Rent room. Construction and finding stock.
The market trends to watch.
Hi Nazir, you and I are here to talk about I think our favourite subject, so I'm Alex Notay and I want to talk about Build To Rent.
Fantastic yes I'm Nazir Dewji and I help you out on some of the construction related issues and we've obviously been very keen on ensuring some of the construction related issues are out there in the fast-moving Build to Rent market.
We're seeing in the market a real desire for both developers investors operators to get to market really quickly and sometimes the only way they can do that is by taking existing stock that's probably been built for sale and trying to convert that to Build to Rent use. Is that something you're seeing?
As well to trying and get this sector going in the UK, absolutely people are acquiring stock that's already there and we're seeing real successes with that all across the UK, actually not just in London, which is where people thought it would start. But I think you're also seeing entities who wouldn't normally take the risk of construction and development do so. So Legal and General for instance, Greystar, both entities that would prefer just to acquire the stock. And that's where I think over time as this sector matures you'll see less and less of that ‘not true Build to Rent’ stuff as more comes through in the market. Because this is a really skinny margins business and when you've got a building that isn't as efficient to run as it might be, as it could be designed to be, that's going to impact those margins.
So when it comes to adapting existing stock the key issue is around specification. It's all about the specification in relation to so many different issues, as you mentioned the operational side is so important. A lot of the build for sale product hasn't perhaps got the level of thinking behind it in terms of future operational costs and also ease of operations in the future. So what is very important is that the specification that you end up agreeing with a developer includes for all of those benefits and sometimes you need to get that done really early, so when you're first looking at a potential scheme that you're looking to buy into you need to have a specification agreed upfront. Because dealing with specification changes later, as you know, costs a lot of money. We've been involved in schemes where, for example, they want to create more community space after the design specification has been set. What that in fact meant was that the building was delivered and then the developer or the purchaser spent a year after completion retrofitting some of the amenity space into that building. That means that building isn't being used for a whole year - no rental income - and you've got the cost of dealing with that much later on, which of course is expensive.
One other interesting point for me on the specification side is how that links into the performance of the building. The sustainability of the building. How does that fit in from a kind of lifecycle construction perspective? As you get people who are involved in the operational side of the building more involved in the design and development side, you are finding real keenness to get involved in that process. You see a real desire to make sure it's not the tick-box and exercise but more of a long-term sustainability exercise, and I think sustainability is on a lot of developers agenda. As well as on the operational side, it's something that we owe to the industry as well and I think we're getting more and more people very much keenly looking at that rather than just being able to put it on their marketing stuff - actually believing it.
Let’s talk about another elephant in the Build to Rent room – construction and finding stock.
Nazir Dewji, Head of UK Real Estate at BCLP, and Alex Notay, Build to Rent Fund Director at PfP Capital discuss the issues investors, developers and operators should be aware of as they try to get to market quickly.
Market insights include: