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Private Rented Sector

Liz Peace BPF

David Milne-Smith PlaceFirst

Stafford Lancaster Delancey

Len Duvall London Assembly

Lesley Roberts Young Group

David Mackenzie Young Group

Andy Belton Notting Hill Housing

Neil Young Young Group

Dr Robin Goodchild LaSalle Investment Management

Nick Jopling Grainger

Susan Fitz-Gibbon ARLA

Michael Oakes Young Group

Mark Weedon IPD

Darryl Flay Essential Living

Prof. Michael Ball University of Reading

Growing the Private Rented Sector Young Young Group: Group: A A Decade Decade of of Shaping Shaping the the Private Private Rented Rented Sector Sector (2003 (2003 –– 2013) 2013)

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Welcome Welcome to Young Group’s latest bi-annual PRSupdate publication. I’m especially pleased that, in our 10th Anniversary year, the current issue of PRSupdate focuses on the growth of the Private Rented Sector (PRS) and, in particular, the impact that institutional investment is having. At a meeting only last week, a client uttered the words “I thought I’d have retired before seeing this level of action from the institutions.” It’s something that I, and the rest of the Young Group executive team, have experienced first hand as our time is increasingly spent advising large institutional investor clients, developers and housing associations. Long gone are the days of just merely talking about investing, as an increasing number of PRS investors look to carve out a niche for themselves in the sector. We’ve been actively shaping the PRS since 2003 and it’s extremely rewarding to be sharing our insight and expertise with clients who are at the forefront of delivering some of the largest and the most innovative PRS projects in the country. Like the PRS itself, Young Group continues to evolve and has built a reputation for delivering robust asset management, supported by customer-centric lettings and management. We provide a tried and tested – yet ever advancing – operational platform to our PRS clients, as well as consultancy services and white label solutions to larger scale investors looking to build an operational brand of their own. There’s no doubt that these are exciting times for the PRS. The growth of the sector is gaining momentum, as the articles within these pages firmly attest. I hope you enjoy this issue and also have the chance to regularly take a look at

Neil Young ACMA CGMA MARLA Chief Executive Officer Young Group and Young London

Inside... 4

Institutional investment in the Private Rented Sector – are we there yet? Liz Peace, British Property Federation


London needs rent reforms to protect Private Rented Sector tenants and help the good landlords Len Duvall AM, London Assembly


Making sense of large-scale residential investment Prof. Michael Ball, University of Reading


The key to affordable family homes: A new style of private renting David Smith-Milne, PlaceFirst

10 Creating value through joint venture partnerships Nick Jopling, Grainger 12 The advantages of Build-to-Rent compared to purchasing a completed development Darryl Flay, Essential Living 15

Developing pricing strategy for large scale Private Rented Sector releases David Mackenzie, Young Group


Large scale investment in the Private Rented Sector Stafford Lancaster, Delancey


In Conversation with... Susan Fitz-Gibbon, ARLA


Managing PRS assets needn’t be a risky business Lesley Roberts, Young Group


Gross to net leakage in UK residential property investment Mark Weedon, IPD


Growing a market rent portfolio Andy Belton, Notting Hill Housing


How do you know when a ‘tenant’ has become a ‘resident’? Michael Oakes, Young Group


The PRS and student lettings market – What Lessons can be learned? Dr Robin Goodchild, LaSalle Investment Management

Liz Peace Chief Executive British Property Federation

Institutional investment in the Private Rented Sector – are we there yet? For as long as I have been at the British Property Federation we have been campaigning to achieve large-scale institutional investment in new homes for the Private Rented Sector (PRS). At times it has felt like a task of Sisyphean proportions.

Not only has the investment world been able to cite a large number of reasons to account for its lack of interest – principally lack of stock, poor management, potential damage to reputation, and, probably most significant, inadequate return – but successive Governments, who professed themselves interested in expanding quality, high volume private renting, never seemed to quite be able to find the right policies to unlock this source of supply. Are we, however, at last about to get that boulder to the top of the hill and, unlike poor old Sisyphus, will it actually stay there? Probably the biggest recent change in the PRS environment has been as a result of the Montague Review. Prior to that, Governments had tried tinkering with the subject. They had introduced Real Estate Investment Trusts (REITs), partially in the hope that these would be used for residential investment. They had, after much pressure, finally introduced changes to Stamp Duty Land Tax, to make bulk purchase easier, and they launched their own ‘Private Rented Sector Initiative’ to encourage potential investors to come forward. Though the move was made without any real clarity as to what they were able to offer to make investment in the sector worthwhile for developers. But Sir Adrian’s report, on the barriers to investment in the PRS, seemed to strike just the right note at the right time and, instead of joining the ranks of those myriad reviews that Governments leave gently gathering 4

“Expanding the PRS is not just about throwing up any old apartment block. It is about creating something new for investors and occupiers.” dust on shelves, Eric Pickles MP not only moved swiftly to embrace the Review’s recommendations, but found additional funding to help seed the Build-to-Rent market with stock. Whether this stock is of investment grade, and who buys it, remains to be seen, and that will prove the final acid test as to whether Montague has worked in moving us towards a position where institutions feel comfortable with investing in residential. Certainly the signs are positive. There is a plethora of prominent names in the investment sector, as well as housebuilders, construction firms and prominent housing associations, who have all successfully bid to receive part of the Government’s £1bn Build-toRent fund. This should result in some innovative bids that not only deliver significant stock into the sector but also the type and quality of homes that will yield the right level of returns for investors. The mere fact that so many quality bidders are involved provides comfort that the initiative will remain on track – and a second round of bidding has been announced for later in 2013.

As well as these solid financial measures, the Government also, at last, really seems to believe that the sector has a significant role to play in meeting the country’s desperate need for housing. Of course a Government, no matter what political complexion, will always be committed to the principle of home ownership as the best route to upward social mobility. But they seem to have accepted the argument that, at a time when home ownership is unaffordable for so many, good quality private renting can provide an acceptable, and indeed necessary, alternative. The importance of this political commitment should not be underestimated. So all this would make it seem like everything is looking pretty rosy. But, as with everything, there are still some challenges that need to be met if the sector is to deliver units in the quantity required and truly become an accepted asset class. Build-to-Rent is a key component of this but it is not yet clear that this is a concept that local councillors and officers fully accept. The Government’s post Montague Private Rented Sector Taskforce, led by Andrew Stanford, has a key role to play in engaging with local councils to persuade them that this is a practical and sensible way of getting new accommodation built – and a legitimate use of local authority land. One area – indeed probably the only outstanding recommendation of the Montague Review – where further policy change is needed is for the Government to provide a strong steer

on the planning treatment of Build-toRent developments. The Montague Review recommended that there should be national planning guidance that stock built and held via a planning condition, for long-term market rent, should be treated differently to housing for market sale for planning obligation purposes, reflecting its different viability. Without such clarity, the financial viability of schemes could become more problematic, thus discouraging investors driven by yield. It is puzzling why central Government has set its face so firmly against making any policy statements in this area, unless it fears the reaction from those who champion affordable housing provision, to which there is a simple answer, namely that rented housing is in itself more affordable and will provide yet another layer of choice for those in need of a home.

This isn’t just window-dressing, but across the sector there are attempts to make Build-to-Rent something a bit better than the mainstream PRS; good sized rooms, plenty of storage space (with additional on-site storage to hire), excellent sound insulation, longer-term tenancies, find-a-flatsharer services, freedoms beyond the norm to personalise what are peoples’ homes, and more besides. In management terms; exceptional levels of security, cleanliness and a concierge to take in parcels will undoubtedly differentiate the new schemes from what has often gone before.

“Across the sector there are attempts to make Build-to-Rent something a bit better than the mainstream Private Rented Sector.”

The sector must also play its part in creating the support systems that will make mainstream residential an attractive asset class for investors. Excellent progress has been made in integrating the Investment Property Databank (IPD) residential index into the all-property index. There is also ongoing work to better understand how blocks of residential rented property should be valued. The PRS Taskforce should also build up a bank of expertise, documents and best practice that will be an excellent legacy of its work.

Expanding the PRS is, of course, not just about throwing up any old apartment block. It is about creating something new for investors and occupiers. The branding and standards of service that is common with US Multi-Family Accommodation seems to be ‘crossing the pond’ and it has been refreshing to see the quality of the offer on various schemes from Thames Valley Housing Association’s Fizzy Living to Genesis at Stratford Halo, and Willmott Dixon’s be:here to Qatari Diar Delancey’s (QDD) East Village.

For the future, the ‘colour’ of the next Government remains very uncertain. But all three main political parties support institutional investment in rented accommodation and the nation’s demand for homes shows no signs of abating. So, hopefully there won’t be too many clouds on the horizon, although the Labour Party is strong on improving standards and tenure lengths for families and that may lead to calls for more regulation which could be unwelcome by some quarters in the sector.

More positively, Labour would like to see more of the £120bn of public sector pension funds invested in housing. It often seems that overseas pension funds are more comfortable investing in UK residential than public pension funds here. Work for the Local Authority Pension Fund Forum by the Smith Institute (Local Authority Pension Funds: Investing for Growth, September 2012) has illustrated a range of challenges to be overcome if more local authority pension fund money is going to end up being invested in housing, from the fiduciary duty of trustees, to skills gaps and a lack of pooling of funds. Which suggests that more work is needed to unlock this potential source of finance. So, to answer the question posed in the title, we are not quite there. But for the first time in eleven years, I am quietly confident that we are well and truly on the way. Thankfully, rather than feeling like Sisyphus, we can adopt a more modern analogy and compare ourselves to Andy Murray embarking on the final set. Liz Peace British Property Federation


Len Duvall AM Chair London Assembly’s Housing and Regeneration Committee

London needs rent reforms to protect Private Rented Sector tenants and help the good landlords London’s Private Rented Sector (PRS) is booming. More than £13bn of rent is paid every year in the capital, with the number of households renting up more than 75 percent in the last decade. Yet, despite the numerous government reviews and third sector campaigns, the policy and regulatory approach to the sector remains stuck in the 1980’s. The time has come to change that. In June 2013 I launched the London Assembly’s Housing and Regeneration Committee report on reforming London’s PRS – which highlighted what Mayor Boris Johnson can do to help. No longer is private renting the sole preserve of the young and economically mobile who value its flexibility. A shortage of social and council housing, mixed with runaway house prices, has made even middle-income Londoners feel the prospect of owning their own home is an ever distant dream. The result has been an increasing use of London’s PRS by those who would previously have sought to escape the characteristic insecurity of the sector. As a consequence, 20% of the recent growth in privately renting households has been from families with children, while a ‘Generation Rent’ has emerged

comprised of those who used to aspire to owner occupation but are now forced to rent.

For many, the sector has become an inescapable destination rather than a destination of choice.

It goes without saying that London’s rents are on the rise. Last year alone, median rents increased by around 9% to £1,196 per month. The year before, rents rose by 12%. But rising rents don’t just hurt tenants – every 1% increase above inflation takes more than £130m out of the pockets of London renters and out of the local economy.

Across the four key areas that were examined by the committee – affordability, physical standards, landlord practices and tenant security – the sector could be accused of, at best, needing to raise its game or, at worst, abjectly failing to meet the housing needs of Londoners.

“No longer is private renting the sole preserve of the young and economically mobile who value its flexibility.”

Our report outlines the political appetite for change in London and it provides a comprehensive assessment of London’s PRS in the early 21st century. The report also delivers a number of recommendations aimed at providing greater stability for tenants: • Rent stabilisation A majority of our Committee are calling on the Mayor to bring forward an effective mechanism to stabilise rents that are becoming increasingly unaffordable even for Londoners on an average wage. • Longer tenancies We believe that homeless households placed in the PRS should have at least a 24 month tenancy – and longer for those families with children – instead of the current 6 month minimum.

“20 percent of the recent growth in PRS households has been from families” 6

• Landlord registration A majority of our Committee believe that landlords must be registered in order to operate in London.

• Higher penalties We think penalties for landlords breaching regulations must be reviewed, including the size of the penalties and making the process of issuing penalties simpler. Currently, a quarter of penalised landlords receive fines of under £1,000, amounting to less than one month’s average rent in London. Of course, not all private landlords are bad landlords and many provide decent homes, treat tenants well, do not increase rents excessively (just because they can) and try to offer clear tenancy agreements that they honour.

“Gone are the days of old fashioned and overly strict rent controls that drove many landlords from the sector.” We need reforms to help make the job of these landlords cheaper and easier. That is why we recommend that the Mayor creates a Decent Homes Fund for the PRS that allows landlords to access low-cost loans to improve the quality of their property. We also recommend that private landlords should be allowed to access specialist advice or repair services procured by local authorities at a lower cost than individual landlords might be able to negotiate. Regulation of landlords is important and the small number of landlords that have joined the system of voluntary self-regulation, promoted by the Mayor, are to be applauded. But in itself the tiny proportion of landlords that have joined the Mayor’s favoured system of voluntary self-regulation

highlights the fact that more needs to be done to protect PRS tenants. There has been a large, and ever increasing, number of complaints about bad landlords. These landlords bully tenants and offer poor homes, at high rents, that are often subsidised by the welfare budget. To add to that, much of London’s private rented housing is in a worse condition than other tenures and about a third of them (more than 250,000 homes) fail to meet the Decent Homes standard used in the social rented sector. This can no longer be tolerated. The PRS has always played an important role in housing Londoners. Our committee is clear that the sector should continue to play such a role and that it should grow in a way that increases the overall supply of new homes. Many will argue vehemently that attempting to protect tenants against excessive rent increases and ensure better standards from landlords and letting agents will push landlords out of the London market and lead to a catastrophic loss of available homes in London. People argue that landlords will leave the market, taking their homes with them.

England. Gone are the days of old fashioned and overly strict rent controls that drove many landlords from the sector. Contemporary ‘rent stabilisation’, in places like France, Germany and the US, is much more likely to consist of limits on the frequency or size of increases – often linked to inflation or interest rates. What tenants will no doubt ask is, ‘If it works in other countries then why can’t we do the same in London?’ I believe that, in London, we currently stand on a precipice. There is hard evidence of the problems within London’s PRS, much of it highlighted in our report, and our challenge now is to ensure that, in the 21st century, London’s PRS moves forward and avoids a return to ‘Dickensian’ conditions. Our report shows how Londoners can get the PRS they want and deserve. It is now down to the Mayor and the Government to deliver in the interests of tenants and good landlords. Len Duvall London Assembly

“If it works in other countries then why can’t we do the same in London?” Yet many – if not most – other western economies have a better regulated PRS and enjoy much larger, more affordable and better functioning sectors than 7

A report from Get Living London by Professor Michael Ball Henley Business School, University of Reading

Making sense of large-scale residential investment Get Living London, the new residential owner and rental management business, commissioned Professor Michael Ball to examine the UK market for large scale residential property investment. His report outlines his findings and highlights the attractiveness of this market from an investment perspective. Residential is a distinctive real estate investment. In fact, it is the largest asset class in the UK by far. The Private Rented Sector (PRS) alone was worth around £1tn in 2011 with an estimated 4.7m properties; 17% of the nation’s housing stock. Yet, institutional engagement is only a tiny fraction of that. Large-scale direct institutional engagement in the mainstream PRS is limited to a handful of enterprises. Several of them have quite significant holdings in high priced locations, often for historical reasons, so that even the measured value can give a misleading impression of the number of dwellings actually owned.

“Interest in large-scale residential schemes has been growing, alongside greater institutional interest.” Numerically, large investors are thin on the ground and, although international comparative data are quite poor, the evidence indicates that they are underrepresented in the UK compared to a number of other countries. Smallscale landlords predominate across the world. Yet, even a minority share of such a large asset class as residential still represents a major investment opportunity. Large-scale investment, furthermore, offers considerable benefits in terms of the functioning of the PRS, because the international evidence shows that it provides distinctive products that many consumers value. 8

There are some signs of greater interest, with recent purchases of some residential assets by large institutional investors, such as the Prudential and Grainger/APG, alongside the continued holding of properties by traditional owners. But there remains far more discussion than action. In contrast, smaller UK Investors have been expanding their portfolios. There has also been a surge of overseas smallscale investor interest in recent years, especially in prime London locations, a part of which adds to rental supply. The majority of investors buy, at most, a handful of properties a year. However, interest in large-scale residential schemes has been growing alongside greater institutional interest. It is argued that the case for investing in UK residential seems strong but there are some issues that suggest that large-scale, ready-built developments operated by professional management teams may provide some of the best opportunities for large-scale investors. This type of investment is common in the US and in some European cities but scarce in the UK. This cannot be simply put down to investor reluctance because there is also a lack of readily available investment opportunities of this sort. The purpose of Get Living London’s report is to outline the benefits of investing in the PRS as a whole and to highlight some potential issues in relation to it. The focus is on mediumterm ‘structural’ issues: because current circumstances are strongly influenced by ever-changing events, and on the basis that large-scale residential

investment is better treated as a longterm, rather than a trading, investment. The report examines: • Why rental demand is growing fast and investment opportunities are improving • London as the core rental market in the UK, with the greatest demand pressures • Investment returns and the dynamics between income and capital returns • Why rents fluctuate less than house prices • Relatively strong residential values over the long term • The significance of depreciation in residential and commercial real estate • Distortions to the own/rent choice generated by taxation • The importance of property management in investment strategies

Download the full report from www.

David Smith-Milne Managing Director PlaceFirst

The key to affordable family homes: A new style of private renting There are deep rooted, and longer standing, concerns about the increased levels of poverty and deprivation as a result of eversqueezed incomes. Like a dilapidated property, the housing sector itself is in desperate need of repair.

In the current adverse economic climate, where home ownership has increasingly becoming a privilege, evidence from the English Housing Survey 2011-2012 Household Report suggests that there has been a shift away from homeownership in favour of living in the Private Rented Sector (PRS). For many, especially those ineligible for social housing, the PRS serves as their only alternative yet, in its current form, the PRS is hardly a panacea. In fact, it is far from it.

“Families find themselves caught in the gap between home ownership and social housing.”

The PRS is typified by insecure short term tenancies, increasing rents and inconsistent levels of landlord service. More broadly, the quality of living conditions can be poor and the quality of regulation, of the more unscrupulous landlords and lettings agents, is unfocused and ineffective. The housing shortage is exacerbating problems within the PRS as demand, for homes of all tenures, outstrips supply. According to a Resolution Foundation report “Home Truths: How affordable is housing for Britain’s ordinary working families?”, the projected growth of households is more than double the rate of new home construction. The report also highlights the fact that families are increasingly spending more than one third of their income on housing costs.

The impact of all these factors includes: • increased levels of poverty and fuel poverty • an increased reliance on food banks • an increased likelihood of rental defaults • a reduction in individual and community wellbeing Due to these factors the Government has placed an emphasis on addressing the challenges faced by the sector. It created the PRS Taskforce, to help shape policy, and also launched a number of investment programmes, such as the Build-to-Rent fund; which aims to create much needed market stimulus. Yet, despite this growing level of political involvement, there remains one area of the market at risk: working families, particularly those with young children, who find themselves caught in the gap between home ownership and the social housing sector. At PlaceFirst we are offering high quality, thoughtfully designed and energy efficient family housing targeted precisely at those who need affordable, secure tenures and want to live in well managed convivial neighbourhoods. We are creating the sort of places where people genuinely want to lay family roots. We are achieving this through two main methods: first, we are refurbishing and remodelling older property stock that we are acquiring at distressed values; and second, we are creating high quality, new build communities, using the latest, and most innovative, housing design models. Our progress

has been rapid and we are on site with more than 300 refurbishment projects; remodelling and re-energising properties that are already situated close to local amenities, and we also have a new build development pipeline of another 500 units. A prime example of our work can be found at Woodnook in Accrington. We acquired properties across four streets and are in the process of turning them into 71 high quality, energy efficient family homes that will be made available at a ‘fair value’ rent. The term ‘fair value’ refers to the fact that our rents will be affordable to those who work hard. It will also reflect the fact that we have invested heavily in the energy performance of the housing, so that there will be low energy bills; and we will offer tenure security for wellbehaved tenants who genuinely want to settle in the neighbourhood. In this example, PlaceFirst’s pioneering approach is one that involves filling a void that sits between the small scale buy-to-let investor and the more institutionally led model that favours the young professional market. However, we feel it is important to have a high degree of balance in our portfolio to ensure we are both serving areas of obvious market growth and also protected from the inevitable vagaries of what has consistently been a cyclical property market. David Smith-Milne PlaceFirst


Nick Jopling Executive Director, Property Grainger

Creating value through joint venture partnerships The importance of institutional investment in the Private Rented Sector (PRS) been widely debated, but until recently little has happened in the way of meaningful investment. The previous barriers to investment are diminishing, and the PRS is increasingly well positioned to move forward and fulfil its undoubted potential. One way in which the sector is becoming more accessible for institutions is through the use of joint ventures for investment. The delivery of an institutionalised Build-to-Rent sector requires the marrying of both development and investment skills and few players can do both on their own. Strategic partnerships offer an efficient way of bringing together the necessary skill sets to create synergies and value. Partnerships could take many different shapes – manager and investor; developer and landlord; or public and private. Through our joint ventures, Grainger provides the necessary skills, connections and local knowledge that investors need to make successful investments. Grainger assumes the role of fund, asset and property manager, leaving the investors to provide land and/or equity, but we also ensure that our interests are aligned with the investor’s, so we either also have an equity stake or the partnership is structured so that we are incentivised in line with the investor’s interests. We believe that this partnership approach has the potential to open up the sector to non-specialists, and facilitate the sustainable growth of the sector. A good example of a manager and investor partnership is Grainger’s co-investment alongside the Dutch pension fund APG in one of the UKs biggest market-let residential funds, GRIP. APG is Europe’s biggest pension fund asset manager – a true institutional investor – and they have invested alongside us in a £350m fund. GRIP is a long-term fund where APG 10

is able to benefit from the long term, visible income characteristics of market let residential property and Grainger’s management platform. GRIP will grow by investing in stabilized, market-let blocks and portfolios and in Buildto-Rent development opportunities. Grainger is paid fees by GRIP for fund, asset and property management, and the fund’s intention is to seek further equity from other like-minded institutional investors to grow the fund. For Lloyds Bank, we provide the Residential Asset Management Platform (RAMP) to manage and maximise values from buy-to-let portfolios which have gone into administration. The specialist RAMP team applies its expertise to offer services ranging from refurbishments to liquidating distressed assets and Grainger receives fees based on rental income, disposals and shared success fees. RAMP is the first deal of its kind in the UK, and Grainger has effectively aligned its interests with Lloyds Bank and other partners for assets placed into the platform, leveraging its management platform for mutual benefit. Our partnership with the Defence Infrastructure Organisation (DIO) and the Homes and Communities Agency (HCA) for the Aldershot Urban Extension is different, but a prime example of an effective public and private partnership. Grainger was selected as development partner in 2011 and from a standing start we achieved consent for a hybrid planning application for a Garden Suburb community of 3,850 new homes, two

new primary schools, two new preschools as well as community facilities on public land within 26 months. The hybrid planning application included detailed planning consent for Phase 1 of the project, which is for 228 new homes and will be going to market before the end of the year. This joint venture will deliver the best value to the Ministry of Defence and help to enhance the Aldershot community as a whole.

“We need to shift our focus from solely attracting investors to being smarter about attracting tenants.” Another public-private partnership is with the Royal Borough of Kensington and Chelsea (RBKC) which chose Grainger to develop and manage two new housing developments on councilowned sites (on Hortensia Road and Young Street) for mixed tenure housing. Some of these schemes will be privately sold, but a large portion will be purpose built rental accommodation under a 125 year agreement to be managed by Grainger. The council will retain freehold ownership of the sites and share the long term rental income with Grainger. Through this public-private partnership and by using Grainger’s development and asset and property management skills, the council is creating significant value for the taxpayer and a long term income stream. The result of RBKC’s partnership with Grainger will bring forward two simultaneous

developments with a combined gross development value of £100m. This project is the first of its kind, and it is hoped will create a model for future deals with other local authorities wishing to generate value and deliver additional private rental housing schemes on development land in their boroughs. Each partnership that Grainger has entered into demonstrates the synergies that can be created between different parties. The process of teaming up investors and property experts to create aligned interests is already proving to generate higher returns and be an efficient value driver. JVs are becoming a more prominent way of attracting additional investment to the PRS – take for example the partnerships between M3 Capital and Essential Living, M&G and Berkeley, and Qatari Diar and Delancey. As the market matures there will be room for growth and improvement and the market will become more focused on the quality of the customer service provided. Somewhere down the road we need to shift our focus from solely attracting investors to being smarter about attracting tenants. The way to achieve this is by modelling Buildto-Rent properties around serviceoriented industries like hotel and retail businesses where the consumer is king and the focus of the business is to appeal to their wants and needs. Subsequently, this will create a more sophisticated market, which comes back to one of the most fundamental aspects of making PRS investment work: driving value. Nick Jopling Grainger

In Conversation with Nick Jopling Can you tell us a little about your background? I joined Grainger in September 2010 as Executive Director with responsibility for property matters from CB Richard Ellis where I was Executive Director of residential. My responsibility covers Grainger’s UK Residential portfolio, development and fund management business units. I was also a member of the advisory panel to the Montague Review and I am the chairman of the Urban Land Institute’s UK Residential Council. For those who may not know, can you briefly explain what Grainger does? Established in Newcastle upon Tyne in 1912, Grainger is the UK’s largest listed residential property owner, manager and developer, and has a substantial residential property business in Germany. Grainger directly owns approximately £2bn of residential property assets and a further c.£900m residential property assets. Grainger owns or manages approximately 35,000 homes in the UK and Germany. Grainger’s business, focused solely in the residential property sector, includes trading investment, property management, fund and asset management, development and refurbishment.

What are the crucial elements for a successful Joint Venture in the Private Rented Sector? Successful joint ventures require an alignment of interest, where all parties work together toward a mutuallyagreed and mutually-beneficial end. What are the main criteria a company should use to help them choose a partner for a joint venture? It is important to partner with organisation that have similar interests and a similar outlook as your own. In addition, each organisation should bring something new and unique to the table, which when combined creates real added value. What are currently the greatest challenges facing the PRS? One of the biggest challenges in the Private Rented Sector at the moment is finding ways of combining the development and the investment models together in order to create suitable stock with an attractive yield. Finally, do you have a favourite London landmark? Battersea Power Station, which I believe signifies how London can turn its history into its future.

Grainger is a constituent of the FTSE 250 index on the London Stock Exchange and the FTSE4Good index. Grainger has recently won Best Property Company – Residential at the Estates Gazette Awards and Asset Manager of the Year at the RESI Awards in 2012 and 2013.


Darryl Flay Chief Executive Essential Living

The advantages of Build-to-Rent compared to purchasing a completed development Demographic and economic trends, together with a fundamental shift in how people live, mean there is unparalleled demand for homes in the Private Rented Sector (PRS). Over the last decade, 10% of households have moved into the PRS making it the fastest growing housing sector, yet around 80% of rental homes are owned by individual landlords. This means that things within the sector are fragmented with many properties run in an amateur fashion with no coherent approach to providing a good service to tenants or help to support and foster a community in the way that an office block, hotel or shopping mall might do. As a result, when people refer to the PRS it brings up visions of university style accommodation nightmares and having to deal with landlords from hell. But at a time when we have faith in the products we buy online and in the holidays we book, why shouldn’t we get the same service when renting a home? One idea is to replicate the US model and provide quality, professionally managed homes. Essential Living’s aim is to create the UK’s first true PRS firm, built from the ground up. We will be building, and operating, a £500m portfolio of 5,000 homes that will be delivered over the next decade. We plan on having all sites, across the South East and Zones 2 to 6 in London, acquired, developed and managed by Essential Living. This may sound like an ambitious plan because, for many, the yields of the PRS are still not high enough when you look solely at the end product. Yet the Investment Property Databank (IPD) Residential Index continues to show strong performance across London, though still too many investors are focused solely on income and not prepared to entertain any element of development risk. 12

Part of the process of designing homes specifically for rent, rather than buying a finished product from a developer and converting it for the PRS, means finding out what tenants want and then factoring it into the building process. Before a development can get off the ground a whole slew of details must be taken into consideration. A lot of our current focus is on defining our brand standards and giving serious thought to how our buildings will look and be managed. Some of the considerations, for a long-term rental product, include deciding if it should have communal facilities that people use for their daily lives or if it should be a low energy consumption building. Before construction can begin land for the developments must be purchased and high land acquisition, and development, costs often make returns unacceptably low for institutions. The increased costs of building rental homes that still look great after five years can render schemes unviable, especially if councils add unworkable affordable housing demands into the mix. But most important is location. Land buying is the bottom of the food chain for property, a very basic yet significant part of the process. While, fortunately, scoping out sites has become faster with the advent of fast paced technology and easily accessible tools, like Google maps, the fundamentals remain the same. People rent for a number of reasons but it seems mainly because they are priced

out of buying. Price continues to drive the PRS market but lifestyle choice and the demographics of the area may also be factors in attraction to an area. So we look for sites on transport nodes, for instance near to the London Crossrail development or sitting above a Tube station. For example, the Elephant & Castle area is an ideal one for PRS developments as it’s only a short walk into the city’s financial district and the West End as well as being on the Northern Line. It is a very well located area and will appeal to a broad range of people. Essential Living has massive financial backing from M3 Capital, a global fund manager that looks after pension fund money, as well as $200m – just for starters – in equity, and will be looking at sites that can provide a minimum of 100 units. Institutional investment will help to drive up quality, increase supply and create a much-needed new source of housing to satiate the needs of professionals and families across London and the South East. It will mean longer tenancies since the homes will be designed specifically for rent and the owners will want people in them for as long as possible. As there is one owner for the whole block of homes, and not 75 overseas investors, this will lead to more involvement in the local area. There will also be improved services due to economies of scale, dedicated professional management teams and homes that have been designed for renters.

Crucially, as the homes will be owned and managed by us, we will have a long term interest in the community. This is different from the conventional housebuilder approach where homes are built and then quickly sold off for a profit, often to landlords who live overseas and have little interest in anything beyond the returns. The other key difference is that our homes will be designed and built specifically for rent, and not just converted to suit the current demands of the landlord. This means the properties will be able to cater for a renter’s lifestyle and will be servicefocused, and have technology geared around ease and flexibility, for example; easy ‘plug and play’ wi-fi. By building and designing homes especially for rent, communities will benefit from a new type of home that meets the real needs of modern urban dwellers. Large investors, like pension funds, aren’t all saints, but they’re certainly not going to want horror stories from disgruntled tenants spread over the media as they are looking to build a reputable brand entity behind their lettings schemes. With the economies of scale effect, new and well built blocks designed for rent become easier to manage with any issues falling to one team to sort out. This should, in theory, lead to happier and more satisfied tenants. Surely the PRS is a no-brainer contribution to resolving the housing crisis and the incentive for a big investor is that, if things are done well, you will keep people longer, void costs are lower and your yield increases. Darryl Flay Essential Living

In Conversation with Darryl Flay Can you tell us a little about your background?

What are currently the greatest challenges facing the PRS?

I’ve been working in the property industry for 25 years. I started my career as a building engineer before working for 10 years in land acquisition. After that, I spent 10 years at Managing Director level in various companies, most recently Oracle Residential.

When dealing with local or regional government it has been difficult to get across the fundamental difference between our offer and that of traditional housebuilders. It is important that PRS developers be treated as something unique from the usual build-to-sell model.

For those who may not know, can you briefly explain what Essential Living does? Essential Living is the UK’s first institutionally Private Rented Sector (PRS) developer. We were created in September 2012 through a partnership between the owners of Essential Land LLP and M3 Capital Partners, a real estate investment and advisory firm. What advantages are there to being able to design and build homes specifically for the PRS? By building for rent, we are able to design our buildings from the ground up specifically for the renter’s needs. Ensuring our buildings have excellent public spaces (where tenants can interact), making sure each unit is energy efficient and as spacious as possible allows us to build customer service into our designs from day one. How does it differ from ‘build to sell’ product? PRS is fundamentally different from build to sell because we are creating buildings that we will hold and manage over the long term. This means putting more thought, and more investment, up front into the design and the quality of the build.

What makes the Private Rented Sector attractive to large scale investors? There’s a growing demand for rental homes and a latent imbalance between supply and demand. Demographics, house prices, mortgage rates and other market fundamentals have led to a surge in demand for renting. Investors have spotted an opportunity here in the UK to create thriving, long-term rental market similar to US models or in European cities like Berlin. As an investor in the PRS what changes, if any, would you like to see the Government introduce? Whitehall has been remarkably supportive of the PRS, acknowledging its potential as a source of homes in under supplied parts of the UK. We would like to see a continuation of this support from the centre, as well as a deeper understanding of our model and our goals at the local level. Finally, do you have a favourite London landmark? The Shard of Glass.




Private Rented Sector Operations and Consultancy

Reputation is everything in the Private Rented Sector

Our robust asset management service, supported by a respected, tried and tested – yet ever advancing – platform puts customer service and risk mitigation at the heart of business operations Institutional investors, corporates, developers and housing associations are benefitting from our robust operational platform and consultancy services

We’ve spent 10 years building our reputation Let us help you grow yours

To start the conversation call Neil Young Chief Executive Officer

Lesley Roberts Director of Consultancy

020 7531 7700 |

David Mackenzie Director of Asset Management

David Mackenzie Director of Asset Management Young Group

Developing pricing strategy for large scale Private Rented Sector releases As institutional involvement in the Private Rented Sector (PRS) gathers pace, and large scale residential rental projects are released to the market, the challenge of developing pricing strategy comes to the fore. Gone are the days of merely looking to the local market for comparables; pricing strategy, for such releases, is a much more complex exercise. It’s an exercise that’s influenced by the overriding business strategy; whether the prime driver is achieving rapid occupancy and cashflow or maximising top line revenue to drive the value of the investment portfolio. Layer on top of this the contractor handover and release phasing (to manage demand and yield), target market, lettings and marketing strategy, and there’s much to consider. When developing pricing strategy for ourselves, and our clients, Young Group adopts a Benchmark Pricing Approach (BPA) establishing a single property price against which all other homes at the development are judged, through a series of adjustment factors. Setting the initial BPA parameters builds on the traditional approach to comparables of looking at the local market by assessing rental performance; but also includes areas and specific schemes from a wider pool, which the development being modelled is likely to compete against in drawing potential residents. This is particularly relevant in large cities, like London, where transportation links and travel times are vital influencing

factors for residents and can result in areas that may not immediately be seen as competitive to be relevant to the price setting equation. Each particular unit is then assessed against a range of criteria to identify its relative positioning within the BPA. Each variance is given an appropriate percentile adjustment to inform the price for that specific home through a defined algorithm. There are a plethora of factors that may result in an adjustment being applied, including; outside space, dual aspect, orientation, location to amenities, floor level, configuration, floor to ceiling height, storage space, kitchen finish, number of bathrooms, floor covering, relative size, furnishing, proximity to retail/affordable/social/commercial, views, premium finishes, comfort cooling, car parking and lease length. Indeed, the relative supply of a number of these factors will further impact the level of adjustment that is made. Some of these are building-specific variances and can be applied across all of the units in a particular block, whereas others are unit-specific and

require either a detailed analysis of the final ‘as built’ floor plan or a physical inspection. The clear advantage of this modelling approach is that it gives a platform that makes it extremely straightforward to keep pace with market movements throughout the release of a largescale project. Once the adjustment algorithm is in place, a change to the benchmark price is immediately reflected in the updated pricing of all units. Similarly, more granular market factors – for instance a peak in demand for units with a particular aspect of a particular size – can quickly be reflected through the model’s pricing algorithm. However, like all tools at the disposal of a PRS professional, the BPA only comes into its own when correctly applied. Compared to sales, the lettings market is quicker to react to economic factors, both locally and nationally. Adopting this analytical approach enables our clients to react quickly to market conditions – and there is great value in being nimble.

A Benchmark Pricing Approach (BPA) considers broad, and more granular, attributes. For example: Block The location of the building relative to transport links, centres of employment, shopping facilities and entertainment venues. Also, its position in regards to traffic routes and the proximity/adjacency of other usage classes or tenure types is important.

Per floor There is a ‘kudos’ associated with being the highest, or one of the highest residents within a building, particularly among a young professional target market. Unit The position of the property within the block and scarcity of the unit type.

Aspect Direct sunlight is generally highly prized and aspects from South East to West (moving clockwise) are in greatest demand. Larger outside space also attract a premium, as do views of greenery, water or landmark buildings.


Stafford Lancaster Investment Director Delancey

Large scale investment in the Private Rented Sector When I was asked to write a piece about the prospects and rationale for large scale residential investment, from the perspective of an active investor, my thoughts began to organise themselves in terms of egg related phrases. Strange, I know, but I decided to go with it. Don’t kill the goose that has the potential to lay the golden egg The UK is facing a well documented housing crisis, amplified in major cities, in particular London. The supply side has to be the answer. We simply need to build more homes irrespective of tenure. The conventional housebuilder market, critically important as it is, can only respond to a point and is generally constrained by a rational analysis of sales rates. Absent extreme London examples where, for now at least, huge volumes can be sold at exhibitions overseas, the UK wide picture is more constrained. The average weekly sales rate for new build across the UK is around 0.5 units per site.

“As an investor, the broad market characteristics look very attractive.” The housing market desperately needs new entrants, a broad cross section of design and tenure choice and innovative ways to attract new capital. On the demand side there is another well documented issue over affordability. The government home buyer initiatives will assist but are not a complete answer. Given supply constraints, mortgage availability and affordability (including, dare I say, the prospect at some point of rising interest rates), more housing choice

is urgently needed. One significant option (amongst others) is private rental. So as an investor, the broad market characteristics look very attractive. Why shouldn’t significant UK and global capital flood in and lay the golden egg? One answer is that there are significant barriers to entry. Policy makers, planners and land owners, particularly in the public sector, have the ability to remove or at least ease some of these and could do so now. Key areas include: • Planning policy For example, viability assessments having proper regard to investment rather than sales values

Delancey have established Get Living London to let and manage East Village’s Private Rented Sector homes 16

• Public land release For example, on long building leases in return for a share of rental income • Tax For example, tax incentives, Real Estate Investment Trust (REIT) structures, VAT treatment and capital allowances

“Post the Montague Report, there are many positive initiatives underway from DCLG and the PRS Taskforce, particularly around finance.” The mythical goose needs care and nurturing to progress through this delicate phase. Post the Montague Report, there are many positive initiatives underway from Department for Communities and Local Government (DCLG) and the Private Rented Sector (PRS) Taskforce, particularly around finance. I hope that we can build on this good work together. It’s a chicken and egg situation The Investment Property Forum (IPF) has just published its second UK Residential Investment Survey. This demonstrates what many of us in the real estate investment world know very well; there is a growing interest and appetite from large scale investors in the residential investment sector. The issue however is that there are very few products to invest into. I heard of a forward thinking local authority pension fund the other day that

decided to allocate a proportion of its portfolio to residential. The number of product options presented, after a full procurement process, could be counted on one hand. The residential sector is in fact far larger than any other property asset class in the UK. It is £4,000 billion compared to a commercial sector of £1,000 billion. However the Investment Property Databank (IPD) residential index covers only about £2.5 billion worth of assets. Of course this lack of coverage prevents progress. Pension fund advisers and trustees can easily point to this as a key risk of investing in the sector. Unknown operators, uncertain financial models and lack of liquidity are all sound arguments. After all, nobody wants egg on their face. The good news though is that there are a number of UK and global investors who, for whatever reason, can take higher risks. They share a desire to begin to create a new investment sector that others, in my opinion, will follow. I would include Delancey in that group. Some have vast experience in the sector globally and we all see the potential to grow the asset class in the UK institutional market. So what is the opportunity? Don’t put all your eggs in one basket The British Property Federation (BPF) published an excellent paper in 2012, addressed to asset allocators, entitled ‘Investing in Residential Property’. Amongst many other things, it highlighted the significant potential of residential property as both a diversifier in a balanced institutional real estate portfolio and an asset with attractive

“It will be critical therefore to demonstrate the steady rental growth characteristics of a residential rental portfolio alongside capital growth performance.” liability matching characteristics for pension and annuity funds. In trying to amplify the potential attraction of the asset class it is worth looking at a few factors that an investor would consider from the commercial real estate world and relate those to residential: • Lease length and security of income Many commercial assets have long fixed lease terms, often over 10 years and with large individual tenants. This length and security of income is attractive to more risk averse investors. Residential investment of scale has many tenants, often on shorter leases. This could be regarded as more risky. However, on the basis of a ‘numbers game,’ it is quite possible there is less risk of default and large scale void. • Rent reviews and rental growth Commercial leases often have 5 yearly upward only open market rent reviews. This does not automatically mean rental growth, particularly in cyclical markets like London offices. The building I work in has a rental level that has never increased from its 1989 level.

continued overleaf... 17

Residential income streams have a direct relationship to earnings, are often expressly linked to Consumer Prices Index (CPI)/Retail Prices Index (RPI) on an annual basis and at times have market growth ahead of that. With the supply and demand dynamics of the market today, many investors regard rental growth prospects as positive. This, combined with the inflation linked element, could be attractive to investors seeking to match inflation linked liabilities. • Returns Whilst most investors gauge performance against total return (of which residential appears to have outperformed other asset classes over many years, albeit from a very small IPD universe) year on year income returns are also a key driver for many. In commercial real estate there is a huge variance between prime and secondary yields, particularly now, but they are generally higher than residential at this stage. It will be critical therefore to demonstrate the steady rental growth characteristics of a residential rental portfolio alongside capital growth performance.

management in commercial property is business to business, often with large lettings. In residential it is very much consumer facing and intensive. • Operating brands Management, in terms of perceived reputational risk and aggravation, is a regular concern cited by investors. A number of strong operating brands exist in student housing, hotels, serviced offices and to an extent in retail. There is little in residential, yet. This is the answer to the management problem. Tenant management teams, employed by building owners and with customer service (not fees) at the core of their offer is, in our view, a very important feature of a large scale residential investment proposition.

“Demonstrating life cycle costs and management of capex in practice is another critical factor in proving the sector to the wider investment community.”

• Liquidity The commercial market is liquid in terms of many players and properties. The residential market is not, yet.

For this reason we have established our own management and letting business, Get Living London, launching properties at East Village later in 2013.

• Management Very high quality management of privately owned public realm is common in commercial property, less consistent in residential. A large scale rental model, with a single landlord, offers an opportunity to change and improve this. Tenant

• Operating costs Generally commercial investments are let on full repairing and insuring leases so that gross rents equal net rents. Residential rents are generally inclusive of service and other operating costs. A rule of thumb is that 30% of gross rents


will be lost through operating cost leakage. This number has taken on a mythical status. It is important to demonstrate that, on scale, this figure can be improved and can be robustly and reliably delivered. This is a key task of the early investors of scale in this sector. • Obsolescence Many commercial assets, particularly offices, are exposed to rapidly changing trends in design, technology and work practices. As such buildings become rapidly obsolete, requiring major refurbishment and even redevelopment after relatively short periods, say 20/25 years. This is rarely fully reflected in a commercial appraisal. In comparison residential is a relatively simple product and less exposed to such extreme factors. However, demonstrating lifecycle costs and management of capex in practice is another critical factor in proving the sector to the wider investment community. So, in conclusion, we have a residential market that looks very attractive to investors. But there are significant barriers in planning and policy terms, plus a chicken and egg scenario in terms of attracting a large scale and broad institutional investor base. However, there are a growing number of active investors looking to establish a market from a small beginning in the belief that there is a large viable asset class to be delivered to the wider market. With proper care, attention and nurturing, the prospects look eggcellent. Stafford Lancaster Delancey

Susan Fitz-Gibbon President Association of Residential Letting Agents

In Conversation with... Susan, can you tell us a little about your background?

What is the biggest challenge ARLA currently faces?

In 1988 I founded Fitz-Gibbon after making my move into residential lettings earlier that decade. Originally I started out in commercial lettings, but felt the right opportunity was presented to me and I went to work in Central London.

Confronting the often negative perception of the industry is one of the biggest challenges. Changing perceptions isn’t easy, and shifting them to something that is truly reflective of the industry requires a huge amount of work. Rogue agents, who act irresponsibly, can take advantage of individuals and offer a sub-standard service thus undermining the hard work we do.

I became a member of ARLA in 1989. I realised I had a duty to ensure I was providing the best service to my clients and ARLA helped me start off with the highest professional standards. Being a member of ARLA also provided me with opportunities to network and build the reputation of my business by association. For those who may not know, can you briefly explain what ARLA does? ARLA is a professional membership and regulatory body for the UK’s letting industry. ARLA’s job is to make sure that consumers receive a professional and transparent service from our member agents as, currently, the PRS is an unregulated industry and there is nothing to stop unscrupulous letting agents taking advantage of both tenants and landlords. All licensed ARLA members must be covered by a Client Money Protection scheme and hold professional indemnity insurance. This ensures that consumers are fully protected if things do go wrong. ARLA members must also adhere to a strict code of conduct and we have a system in place to protect tenants if they feel an ARLA member has not behaved appropriately. What are the benefits, to lettings agents, of ARLA membership? Membership of ARLA can potentially drive footfall and sales and helps to boost the credibility of your business by providing quality assurance to prospective clients. Affiliation will also increase brand awareness and exposure for your business and the use of the ARLA logos can enhance agents’ marketing activities.

ARLA has been pushing for regulation in the lettings industry for many years now and has been successful in pushing it higher up the political agenda. We want there to be a level of professionalism that is enforced by law to weed out those who offer sub-standard services. What steps should be taken to improve standards within the Private Rented Sector? I strongly believe that professional standards are important in improving the PRS. Professional standards should be consistently high and ensuring this will enable agents to provide the best service they can. The best way to do this is by training and educating staff and I believe all agents should be knowledgeable about the industry they’re in. This is why ARLA offers a range of training services to members. Offering routes to redress is equally as important. We are dealing with people’s homes and lives here and there needs to be structures in place so that complaints can be dealt with efficiently and effectively. Following a set code of conduct will also help improve the PRS because it would ensure agents have to provide a certain level of service to their clients. It also allows agents to benchmark their standards and improve them when they fall short of expectation. Finally, do you have a favourite London landmark? The Globe is truly a wonderful place to visit and one of my favourite landmarks in London. The traditional architecture transports you back in time and the location is beautiful.

Membership of ARLA also provides access to training and networking opportunities with peer companies and other organisations. Members have access to exclusive insight, research and opinion on issues and developments relevant to the market and access to a Client Money Protection scheme, fulfilling a legal obligation. 19


A Young Group Company

Find Your Home

Award Winning Residential Letting and Management

in association with

201 -500 properties

Lesley Roberts Director of Consultancy Young Group

Managing PRS assets needn’t be a risky business Assuming that those who hold Private Rented Sector (PRS) assets have made sound acquisition and/or development decisions, the degree of success, or indeed failure, of their investment will lie in the strength of their asset management and, in turn, quality of their day-to-day management operations.

“The backbone of any exceptional operation is having defined workflows.” Whether an investor is asset managing their own portfolio or using a PRS specialist, in order to maximise the benefit of strategic asset management it’s imperative to have accurate reporting and responsive operations. Without either, even the best asset managers will achieve only mediocre results whilst potentially being exposed to unnecessary levels of business risk. The backbone of any exceptional operation is having defined workflows, supported by appropriate operational systems and IT. Thorough Young Group’s consultancy work, I find it eye-watering just how many organisations haven’t put adequate time and resources into getting these fundamental business operations as bulletproof as possible. Central to any PRS operating business is a robust Management Information System (MIS) and we’ve invested heavily in building an MIS platform that provides the five key elements that we, as asset managers and front line operational specialists, as well as our investor clients require: • Live, real time operational performance reporting • Robust financial reporting • Streamlined lettings progression • Compliance fail-safes • Integrated maintenance and property management tracking

Aside from the reputational risk associated with poor operational performance, there are a host of legislative and compliance risk factors that can be mitigated by robust processes, procedures and systems; from ensuring that a contract cannot be executed in advance of the required due diligence and receipt of funds, to the potential consequences associated with an expired or nonexistent Gas Safety Certificate. It’s only by adhering to rigorous operational workflows that risk can be minimised. By building a robust MIS that intuitively mirrors business processes it is possible to mitigate exposure to risk.

“Often the smaller advisors and suppliers are at the leading edge of innovation.” In developing our own MIS platform, we were keen to ensure that fail-safes were built in. For instance, it’s not possible to begin marketing a property unless an Energy Performance Certificate has been assigned. Referencing can only be instructed once full contact details have been received and copies of passports are held on the MIS; nor is it possible to populate an Assured Shorthold Tenancy contract (let alone email it for electronic signing) until all relevant references have been received and approved. Similarly, it’s not possible to release keys until all move in monies have been receipted and a file cannot be closed until the deposit registration certificate has been received and the logged in the MIS.

Ultimately, reducing business risk is essentially reducing exposure to unforeseen costs and/or reputational harm (and its associated costs). The benefit of supporting appropriate processes and procedures with a robust MIS platform, and other IT systems, is that they not only mitigate against the potential costs of risk, they also bring about operational efficiencies. These efficiencies, which simply can’t be replicated by manual systems, have a direct impact on management cost savings, acting to minimise gross to net leakage and positively influence the bottom line. On the subject of risk, it’s refreshing to see that a growing number of institutional investors already appreciate that there is more to risk assessment than a Dun and Bradstreet report. After all, it is often the smaller, fleeter footed advisors and suppliers who are at the leading edge of innovation. Our robust operational platform and sophisticated reporting and analysis are key in enabling us to provide a range of consultancy services. Whether our clients are making use of our operational platform, relying on us to deliver direct asset management of their portfolio or benefiting from our expertise in running a successful letting and management operation; we simply couldn’t provide the service our clients deserve without clearly defined workflows supported by a robust operational platform. This is a topic that I am passionate about and always happy to discuss in more detail. 21

Mark Weedon Vice President Investment Property Databank

Gross to net leakage in UK residential property investment Income matters in the Private Rented Sector. At a recent IPD conference, Rob Martin of Legal & General Property mentioned that one of the two main barriers to institutional investment was low yields (the other was a lack of institutional grade stock, but we will not address that here). One possible solution raised by Martin was for the investor to enter at the development stage to increase yields, but, when we analyse the difference between gross and net income leakage in the PRS, it is worth noting the shortfall in PRS income can be lower than expected, and professional management can mean ‘professional’ yields. Low income Residential assets are a victim of their own success in regards to income. Continuing house price inflation in areas of high employment, namely, London, the South East and second tier regional cities, means rental growth has not been able to keep pace with price increases.

“Professional management can mean ‘professional’ yields.” As a result, residential net income yields have been compressed down to 2% for prime central London, and to 4.5% for managed portfolios in the South East and other regions. For income focused investors, this compares unfavourably to the 6% average net yield of commercial property. This, however, is a narrow approach to take regarding the performance of the sector. Though residential has always been driven by the owner occupier market, (which retains 65% of tenure in the UK against 18% private landlord, 17% social), the rise of ‘generation rent’ 22

means that there are strong drivers for future rental value growth. Furthermore, current forecasts suggest yield compression cannot continue. Simply, average prices cannot continue to grow faster than rent in the long term. This observation appears to have credence, with the IPD UK Residential Index showing rents increasing at a greater rate than values in areas of London and all of the UK’s regions during 2012. Rental growth aside, the lower net income yield of residential is also a factor of the levels of expenditure required to manage assets. The greater intensity of individual tenants compared to commercial lots means more time, effort, and money is needed in management, maintenance and reletting, which reduces net income. However, these costs are not as high as many suspect. Figure 1 shows the levels of net income remaining after voids, rent free periods and operating costs have been deducted. UK PRS stock (excluding central London in this example) compares well to commercial property in terms of occupancy levels and the lack of requirement for rent free incentives, and although running costs remain higher, residential stock still achieves a net income of 68.1% compared to an average of 81.8% for all commercial property. Though costs are higher, they are nevertheless competitive when analysed correctly, especially when the strength of occupier markers are considered. While future demand for

residential stock is promising, in the commercial sector leasing remains difficult. Better Management means lower costs Assessing the level of operating expenses incurred by landlords in the PRS is fundamental in defining a property’s value. Any landlord should have a good understanding of the level of operating costs spent on maintenance and management of a portfolio, as it allows an accurate net rental income to be established. This in turn is expressed as a percentage of a property’s value, from which can be derived a net yield and net income return. However, the level of management cost incurred in the PRS is not uniform, and varies depending on management technique as well as property location and quality – which necessitates the calculation of an accurate net yield. This is something we have been concentrating more on at IPD, as the PRS must get this point across to those looking to enter the sector. At IPD, our Residential Index now measures almost 2.5bn of commercial grade stock. The granular nature of our data collection enables us to identify gross rent and net income by stripping out all areas of costs associated with the management of a residential property, irrespective of the landlord’s ownership being freehold or leasehold.

Net Income Calculation Gross rent demanded – Voids – Write-offs – Expenditure on Voids – Maintenance – Insurance – Utilities – Management Costs – Letting Costs – Service Charge & Ground Rent – Other + Other Income = Net income

“UK residential has outperformed core asset classes and commercial property over the short and long term.” The property level net income figure is still gross of all “vehicle” level costs, such as interest on debt, fund management fees and tax, to ensure that figures are reported consistently across all properties, irrespective of the type of investment vehicle/company they sit within. Furthermore, the data provided to IPD is consistent irrespective of the cost structure set up by the property owner/manager. We need to make the data consistent across property sectors to enable like-for-like comparison between residential and commercial property. Despite the desirability of residential property to institutional investors, they still have little or no allocation to residential – and we are seeking to help address this by producing quantifiable data on gross to net rent leakage.

A capital hold with income The lower yielding nature of residential compared to commercial property is unlikely to change in the short term, but, crucially, this analysis and research shows that an ‘acceptable’ long-term yield of 4.5%-5% can be achieved by residential assets if the right property is found and managed by experienced professionals.

Figure 1

Property Management Costs Percentage of gross income lost (12 months to December 2012)

For a safe capital hold, this small increase in yield makes all the difference. Commercial investors in London, or the debt markets, can expect similar yields for prime, safe stock, and these are without the capital improvements of residential assets. Because despite low yields, UK residential has outperformed core asset classes and commercial property over the short and long term due to the high levels of price appreciation. With capital improvement included, residential has proved an extremely attractive investment. Ultimately, investors need to match their liabilities. Both the past performance and forecasted future performance of core asset classes suggest that alternatives will be required to ensure target returns are met, and private rented residential could be just that alternative. Professional residential management companies, with proven track records for delivering an above average net yield can help convince potential investors that residential will deliver for them. But it still all depends on investors, and what they want. Mark Weedon IPD


Andy Belton Chief Operating Officer Notting Hill Housing

Growing a market rent portfolio Notting Hill Housing (NHH) celebrates its 50th birthday this year. Along with many other housing associations we have a proud history of housing people in London who are on low-incomes or in need of specialist accommodation and services. NHH is an independent, not-for-profit, social business, whose purpose (again, like most housing associations [HA]) is to provide good quality homes for those who could not otherwise afford them.

“Housing associations are well positioned to provide new homes to be let in the Private Rented Sector.” However, in recent years, commercial pressures have changed business models and introduced new risks for those associations that want to continue developing new homes: Government grant has been substantially reduced; HAs can charge higher rents for Affordable Rent but in return are taking on more debt; they must diversify the range of products

on offer to make higher surpluses; Welfare Reforms will increase rental arrears and bad debts (at least in the short-term); previously predictable levels of income from social rents are less predictable (for long-term business planning) and HA’s have become more reliant on capital markets to provide new long-term debt (NHH has raised £400m through bond issues in the last two years to fund its medium-term development programme). From our early years we have grown in numbers and financial strength and always tried to keep providing more housing in London whatever the political or economic climate of the day. Social housing has always been at the core of what we do but we have branched out over the years into shared-ownership, temporary housing – itself a part of the Private Rented Sector (PRS) – supported housing,

Notting Hill Housing has acquired 204 units in the Rathbone Market development 24

student lets, private sales and more recently, market rent. Our growth strategy is still very much based on mixed-tenure development. Figure 1 shows the NHH development pipeline over the next five years. This plan delivers just over 7,000 new homes by 2018. Almost 60% of these are subsidised ‘affordable’ homes – for either Affordable Rent or Shared Ownership. Although still in the minority, the balance – twenty per cent for private sale and twenty per cent for market rent – represents a significant increase, compared to previous years, in the proportion of development for the private market.

“The so called squeezed middle now have to continue private sector renting into their thirties or forties.” We began to invest in what we call our ‘Market Rent’ business in 2007. We have built up a portfolio of 500 homes made up of three large schemes (of 86, 106 and 182 units) and 17 small schemes ranging from one house to 35 flats. We have built the business quietly and acquisitions have been opportunistic and in some cases accidental (in that we inherited one of the largest schemes when we acquired another HA). We have properties in twelve London boroughs – some newbuild, some secondhand and some were working PRS portfolios that were tenanted when we bought them.

Figure 1 want an affordable rent – currently our portfolio is middle-market and we charge an average of £220 per week. We are buying land in less expensive but accessible parts of London in order to build homes specifically for market rent. They want quality design – we are learning from our existing tenants about design improvements they desire. They also want security and stability. We are therefore considering using time limited Assured Tenancies (or longer ASTs) for this group – say for five to ten years. We are also discussing the offer in terms of management and maintenance. If it were possible for tenants to self manage and carry out their own repairs and improvements we could theoretically reduce the rent.

Right now, HAs, including us, are well positioned to provide new homes to be let in the private rented sector. We are well positioned because we have 50 years experience of providing homes and good quality management services. We understand the commercial risks and we have the financial capacity to keep growing. Growth of our Market Rent portfolio fits with our overall growth plans – due to reduced grant levels we need to generate more surpluses and being an established PRS player hedges against the risk that the sales market might stall. Growing our PRS business provides much needed homes that we will hold in the long-term – along with reasonable returns to reinvest in building more homes. We have 720 market rent homes in the development pipeline which will be let over the next three years, with a further 780 planned. Overall this will represent an investment of £500m, in our Market Rent portfolio by 2018.

Those in average or low paid employment could historically rely on the social rented sector, especially when they started a family. As numbers have decreased (right to buy, and increasingly conversion to affordable rent), needs have increased and most lettings now go to the most vulnerable. The so called squeezed middle, who used to rent until they had children, are now – if they want or need to stay in London – having to continue private sector renting into their thirties or forties. At NHH we believe that helping this group – who are the same people who access our Shared Ownership product – is part of our social mission. Having identified this customer group – the working poor, the keyworkers, the struggling, indebted families, people who need some help from housing benefits to pay the rent but are broadly self sufficient – we are now trying to make sure our offer meets their needs. They tell us they

This is a young business for us and, although we can draw on our traditional experience, during our period of quiet growth we have learned valuable lessons about managing a PRS business – we now have conversations about ‘gross to net leakage’ and get strange looks from our colleagues who manage our social housing. As we move to the next phase of growth we are looking at re-branding and modernising our IT for the NHH ‘Market Rent’ business so that we set out our stall more clearly to customers looking to make ‘rent or buy’ decisions with NHH. For NHH we believe we can address a gap in the London market: quality homes, professional management service, greater security and affordable rents. As a not for profit business with 50 years of development and management experience we believe we can make a better offer to Londoners who have limited choices today. Andy Belton Notting Hill Housing 25

Our Customer Service Commitment

Young London wants to be AMAZING Since our beginnings we’ve questioned everything about ‘traditional’ estate agency. We look at everything afresh. We build lasting relationships with landlords and residents by delivering ‘AMAZING’ customer service. We’ve broken the ‘traditional’ remuneration model; staff are rewarded on their customers’ feedback NOT on commission. We keep as many aspects of the business as possible in-house, to remain accountable to our clients. Our approach has been proven through business growth and acclaimed by numerous awards.

We want to amaze YOU. . .


Michael Oakes Director of Communications Young Group

How do you know when a ‘tenant’ has become a ‘resident’? Those of you who know Young London, Young Group’s operational brand that delivers lettings and management services on behalf of our investor clients, will know that we don’t refer to ‘tenants’. Instead, we have ‘residents’.

When is a Tenant a Resident? I’m sometimes asked what difference it makes. “Surely there’s no single defining moment when a ‘tenant’ becomes a ‘resident’? Isn’t it just semantics, after all?” is the response from less forwardlooking corners of the property sector. Well, some of us who are at the sharp end of the Private Rented Sector (PRS) know how important the distinction can be. Vital, not only for enhancing the reputation of the sector, one which is often maligned by the actions of a small minority of poorly performing agencies, but also for the resulting performance enhancements that it brings to residential investment assets.

“The term ‘tenant’ is a transaction focused term and represents the old status quo.” You say tomato… Being a resident is more than semantics; it’s a state of mind; in both how we deliver our service and how our customers experience it. The term ‘tenant’ is a transaction focused term and represents the old status quo. Moving to a new relationship-based business model, one that’s focused on consistently providing the best customer experience possible and making tenants feel like residents is not only the right thing to do, but it also brings tangible business benefits.

Without a doubt, businesses that build relationships with their residents and deliver a responsive, straightforward and reliable service throughout their residents’ stay are the ones that will reap the greatest benefits. These include; longer tenancies and an enhanced desire to remain in their home, shorter void periods, rental uplifts, lower maintenance costs through earlier fault reporting and increased new business through referrals and brand enhancement. It sounds like a no-brainer… So why aren’t all operators adopting this model? The answer is that exceptional levels of customer service are hard to achieve if the internal reward structure is based on transactional commissions. Young London’s solution was to put robust mechanisms in place to independently monitor customer service delivery and to link remuneration to defined customer service targets. But that’s only part of the story. Internal buy-in is critical in making a new relationshipbased business model work. Customer service excellence has to sit at the heart of the business, be supported by superb processes and systems, quality assurance, training, mentoring and development. We look to complementary business sectors for inspiration and have learnt much from the hospitality and retail industries, not least for their focus on creating an enhanced customer experience. In fact, when recruiting, our preference is for customer service skills over property sector experience.

“Delivering stand-out customer service isn’t complicated, it is an art.” It’s all in the detail But what does being a resident mean? To me, it means striving to treat those who choose to live in our homes even better than we would like to be treated ourselves. Delivering standout customer service isn’t complicated, it is an art. Getting the basics right is imperative and should be a given (being accountable, responding quickly, empathising etc); it’s the extra details and small enhancements that really make a difference to how customers feel about their experience. For instance, when we heard that a number of our residents, new to London, didn’t have an existing network of friends, we started our regular resident drinks evenings to kick start conversations with neighbours. And when we go to a resident’s home to carry out maintenance or a ‘midterm housekeeping visit’ (which some businesses call ‘inspections’), it’s only right that we leave a card to say thanks to let them know we’ve called and include details of any follow up that might be needed. Small examples; but we work on the premise that if we can make a 1% enhancement to our operations and to our customers’ experience each and every week, we’ll achieve great things for our residents, our clients and our business. 27

Dr Robin Goodchild International Director LaSalle Investment Management

The PRS and student lettings market – What lessons can be learned? Students are an important part of the Private Rented Sector (PRS) as many university towns and cities have districts where a significant proportion of the housing stock is rented out to students. Some of those areas have experienced noticeable change during the last decade following the advent of new purpose built accommodation designed to be rented by students.

Moreover, much of this space has been funded by institutional investors, in marked contrast to their lack of participation in the general PRS market. What lessons can the mainstream PRS learn from the student lettings market? I believe there are a number, but before providing my thoughts, it is important to understand how the student market has evolved to reach the place it is today. Contrary to popular myth, the student market has not been an overnight success – it has taken 20 years to reach its present state of maturity. The story is best told through the history of Unite plc – the leading player in the sector and responsible for much of that growth. The company

was founded in 1991 and its first scheme was the conversion of a redundant inner city office in Bristol. A listing on the Alternative Investment Market (AIM) followed in 1999 and the company moved to a full market listing 12 months later. The UNITE UK Student Accommodation Fund (USAF) was created in 2006 as an openended specialist private vehicle for institutional investors. USAF today has a UK portfolio of 63 properties in 20 markets with over 21,000 bed spaces valued at over £1.2bn. This portfolio is managed by Unite plc and the company controls over 40,000 student units in total. Unite has been joined by a number of other operators, notably, UPP and Liberty Living who both control over 15,000 bed spaces while Watkin Jones is a major developer/manager. As a

Figure 1 Reasons why Institutional Investors are attracted to different residential assets (relative importance of factors)

Reasons for investing



Returns Profile



Development Potential


Stability of Income



Stability of Capital Values



Low Correlation with Other Asset Classes



FRI Leases with RP Indexation


Similarity with Commercial


Source: IPF Residential Investment Intentions Survey 2013


result there is a thriving investment market and a transaction volume of £2.7bn was recorded in 2012 by CBRE, a 125% increase on the previous year. This compares with the total stock of residential property (including student accommodation) held by institutions according to the latest International Property Databank (IPD) Annual Index of £4.9bn so it could soon comprise the bulk of this exposure. The Investment Property Forum (IPF) carries out an annual survey of institutional investors’ intentions towards the residential sector and it asks questions about both the PRS and student markets. The results, in Table 1, reveal that they find the Returns Profile of student lettings overwhelmingly attractive, though they do recognise other benefits. The Returns Profile for the PRS, while still appealing, also requires support from other factors, including development and stability of income, to attract investors. Every investment has to offer an enticing returns profile and the student lettings market has been successful at raising institutional capital because it offers three key benefits that mainstream PRS struggles to deliver. These are: • Investment Scale Appropriate lot sizes plus the opportunity to participate in an investment programme • An attractive net income yield Property investors expect a significant proportion of their

return from predictable cash flow and not too much relevance on volatile capital gains • Long leases Let to quality tenants often substantial public sector bodies with a quasi-government guarantee. Moreover, the whole package resembles commercial property that is typically let on long leases with full repairing and insuring terms that require limited day-to-day management. Established institutional investors have been readily able to add student lets to their property portfolios because it has required no adjustment to their operational processes. Mainstream PRS is much harder to accommodate in established institutional portfolios because of concerns over lot size (the ideal is units of £10-50m) and the need for a different approach to management when leases are of short duration and gross of costs. However, these challenges are not insurmountable. They do though require all stakeholders in the industry to adjust their behaviour. The IPF Investor Intentions Survey finds that the level of net yield is the most important barrier to institutional investment. Student lettings deliver an attractive income because it has its own specialist Planning Use Class and is not required to subsidise affordable housing through S106 agreements, in line with main stream housing development. The key recommendation (for me) in the excellent Montague Review of institutional involvement in the PRS was for Market Rented stock to have

some status within the S106 regime as a compliment to affordable housing, so reducing its land cost. Despite the Government’s rapid acceptance of Sir Adrian’s other ideas last autumn including capital funding, the S106 point has not been fully picked up except by the Mayor of London’s office in its planning guidance. Until the Government is prepared to favour the PRS over owner-occupation in the requirements for affordable housing, it will be hard to persuade developers to Build-to-Rent rather than for sale.

“Mainstream Private Rented Sector is much harder to accommodate in established institutional portfolios.” The PRS can attract significant institutional capital if it can follow the example of student lettings. This requires the creation of blocks designed to be rented, similar to Multi-family developments in the US, together with embedded management that is motivated to deliver a consistent level of net income to the owner, not merely maximise its fee income. These blocks need to be of sufficient scale (individually or in clusters) so they can support their own management team which would handle both lettings and day-to-day issues. Institutional investors are always highly sensitive to potential conflicts of interest, both perceived and actual. The ideal solution is therefore for the manager to procure the construction of the block and retain an equity stake to ensure alignment with their investors in delivering consistent returns. If the manager can demonstrate s/he has a

good track record, then institutional capital is likely to follow. And income should be enhanced by efficiencies in blocks designed to be rented, so improving the net yield.

“The returns profile for the Private Rented Sector requires support from other factors.” There is a way that investors can get a higher income return in the present market – go outside London and Southern England where housing markets are cooler and there are apartment buildings for which owneroccupier demand is thin. Most institutional investors prefer the greater economic strength of the South but they do invest outside it when expected returns exceed the perceived risks. As commercial markets get more competitive, especially in London and the South East, provincial cities with established PRS markets should become more attractive. The growth of the student market over the last 20 years has demonstrated that institutions will invest in residential property. The PRS can attract their capital if it provides institutions with the same complete package in an aligned business model that offers a reasonable net yield. Dr Robin Goodchild LaSalle Investment Management


“Demystifying Renting” During a free 30 minute seminar

Young London’s award winning experts will arm your employees with the knowledge to rent a home or let their property Contact us and we’ll help you to help your employees!

Contact: Michael Oakes Phone: 020 7593 3300 Email:

Young Group has been shaping the Private Rented Sector for a decade, having built an enviable reputation for delivering robust asset management supported by a proven customer-centric lettings and property management platform. Young Group’s operational business, Young London, has won multiple awards for the quality of its service and forward thinking approach to the day-to-day management of PRS assets, tenancies and resident services, from The Times, The Sunday Times, HSBC and Bloomberg. Young Group’s clients include institutional investors, corporates, developers and housing associations. We provide a respected, tried and tested – yet ever advancing – operational platform to our PRS clients, as well as consultancy services.

Neil Young ACMA CGMA MARLA Chief Executive Officer

David Mackenzie FCMA CGMA MARLA Director of Asset Management

update PRS



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PRSupdate Autumn/Winter 2013  
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