Back

How can lessons learnt from hotels transform the PRS?

18th Oct, 2016

PRS Developers stand to benefit significantly from a project management team well versed in the hotel sector

There is a growing appetite in the UK to develop the PRS (Private Rented Sector) from all fronts; market demand, funders, developers and contractors are establishing their developer/contractor models to deliver in this ‘new sector’.

The ‘Build to Rent’ (BTR) model will be a fundamental element of this growth in London and  the regions but is the sector’s existing approach to this model progressive enough to succeed?

This model’s success is dependent on a change in mindset from suppliers to the market and the consultants that serve it and our view is that much can be learnt from other parts of the property mix.

From a residential development mind-set, developers build volume, compare sq.ft rates and sell units throughout the build period to owner/occupiers or investors/landlords. When a unit has been sold, any ongoing obligations for the developer to manage the product, improve operations, or address internal or external perceptions of the scheme dissolve the further from the point of sale you get.  We do not believe that this approach will succeed for the long term to help BTR become a viable alternative and must look at other property sector models to see what can be learnt from their approach.

The impact of failing to deliver the right product in the hotel market usually manifests itself relatively quickly.   A hotel service offering may survive a couple of months after launch, even if the pricing and model are misaligned, but consumer demand will soon dictate the average daily rate if the end product is not in line with occupier expectations.  And this is why there is security for developers in working alongside those teams with operator experience at established hotel brands.

Whilst not as immediate as hotels, we suspect that the market evaluation, ranking and preference of the various PRS offerings under development is still to occur in this emerging sector. It is likely that a platform for public product comments and customer experience comments, much like Trip Advisor, will emerge more prominently for this market. This is where the Operator’s successful delivery for the building management and customer service is fundamental to a PRS development achieving low-tenant-turnover, and, ultimately, positive reviews.

Like hotel guests, PRS residents will expect a community, a palpable culture, a sense of lifestyle and certainly not a “unit”.  In our view, the existing and aspiring PRS operators and developers need to consider their customer in this light, and the residential delivery model may struggle in its transition into PRS if not carefully considered, managed and delivered with at least some level of experience across the sector.

The delivery of PRS schemes can carry many pitfalls, so we argue that rather than take the established residential model and add/invent a service model, why not start at the other side of the spectrum.

Let’s take a model that has grown in the UK over the last ten plus years to become one of the leading markets in the world.  One that has well established supply chains, funding solutions, and delivery models capable of going from inception to completion of 100-bed properties within a year…hotels.

In property terms residential development has long been regarded as wholly different to the hotel sector; however, when you scratch below the surface there are numerous similarities between PRS and hotels.

The hotels sector has seen strong growth throughout the last few years – sector specialist STR reports that average revenue for the sector has grown for a record 30 months consecutively.  And as project and cost managers we have seen the streamlining of hotel developments to deliver quicker, better products (financially and physically).   Long gone are the days where clear sites and perfect room dimensions to fit brand models set the precedent as to whether properties could be successful as hotels. And there is no reason why the lessons and skills learnt and honed on these projects shouldn’t be applied to PRS developments.  In fact, you might suggest that it was imperative to do so and to ensure that the sector produces enough space to accommodate foreseeable market demand.

Hoteliers and developers have evolved to meet the spike in demand, looking into 11sq.m rooms, rooms with ‘no natural light’, and rooms constructed within containers to generate speed to market. The word ‘boutique’ has taken on new meaning in the industry and all of this coming secondary only to the guest offering, the lifestyle, the setting, the reason for wanting to be in any one place for any period of time.

Eight Key Similarities between PRS and Hotels – if the approach to BTR was altered to reflect these eight similarities then its longer term success would become more certain. 

1.      Investment Model Investors focus on net operating income (yield), rather than individual capital values (IRR)
2.      Product Philosophy Excellent customer service is the single one component of product success, as word of mouth is fundamental to product longevity
3.      Brand Strategy To up-sell an aspirational lifestyle to the Guest/Resident, not just provide a roof over a traveller’s head
4.       Product Location Proximity of product location to transport/accessibility to/from the site is a critical component to its success. Also important is its position in relation to a desirable community
5.      Design Priorities 1) Create Atmosphere/Hub in lobby/entrance area, restaurant/bar
2) Maximise rentable net floor area
3) Efficiency of building management & operations
6.      Operations Strategy Management of guest booking, check-in and check-out, and the efficiency of repair/refresh turn-around is key to maximising profits through higher occupancy.

Management of tenant churn, and the speed and cost of a unit refresh between letting is key to efficiency

7.      Maintenance/Repair Strategy Operations procedures should be fully considered from the perspective of guest / resident experience during maintenance, before they are accepted by the Client
8.      Refurbishment Strategy Development of lifecycle costs and cyclical repair/replacement strategies on a cash flow month-by-month basis is fundamental to achieving long-term positive cash flow

What can the PRS learn from the hotels’ sector?
At the ULI’s Build-to-Rent: Design Guide conference, hosted by industry star Alex Notay (http://www.aknotay.co.uk/), the key message from PRS developers was that the industry’s perception of renters has to shift. They are not ‘tenants’, but ‘residents’, and really almost guests. They are the customer who pays the bill, and therefore their happiness is paramount.

The speakers and contributors could not have emphasised the importance of delivering a client-focused service more clearly. Geeta Nanda, founder of Fizzy Living, and CEO of Thames Valley Housing Association, was very clear on this matter when she declared that “happy residents would create happy investors”.

We have observed first-hand how successful hoteliers and hotel operators work to fully understand the needs, expectations, and most importantly aspirations of their guests. It is our belief that, like the PRS developers at the ULI event explained, it is a happy resident that is the key to achieving a successful PRS scheme.

Therefore, if a happy resident is the common denominator for success in both hotels and the PRS, then responsibility for delivering and sustaining a successful PRS scheme sits with the 0perator. Once we start to consider how truly pivotal the operator’s role is, a host of other similarities arise that are all connected directly to the resident’s experience of the building. These include: interior design, fixtures, fittings and equipment (FF&E), operating services and equipment (OS&E), customer service, logistics, operations and maintenance.

Operators are common place in the hotel industry, and have been in existence for decades in the form of international operators. Successful hotel operators have made it their business to place their own understanding of their guests at the heart of the business.

What is arguably most exciting for the PRS developers and aspiring operators in the sector is that it is experiencing rapid growth and expansion at a time in history when we are seeing a global emergence of highly successful operator business models in other areas. Operators such as Uber, AirBnB, Alibaba, and Amazon have seen unprecedented growth and success in recent years, and like their hotel industry counterparts, they can attribute a large part of their success to their having placed their customer at the core of their service.

This new generation of operators make knowledge and understanding of their customer their number one priority, and with their service they support their customers to live, travel & share around the world. They are also building models that are becoming increasingly adapt at crossing into different sectors, for example, Uber has recently launched new sister company, UberEats, a food delivery service. An equivalent example within the property industry is co-working provider WeWork’s launch of its residential ventures in 2016.

We believe that this all points to an exciting opportunity for hotel operators to capitalise on the experience they have accumulated within the hotel industry, and bring their knowledge and skills to the PRS.

What Key Strengths do PRS Operators Require?

  • A better understanding of social media, branding, & marketing for the long term – to retain tenants, and build client relationships;
  • Implementation of TechNobody management systems, including client interfacing portals (eg, iPad/iPhone apps & platforms) to aid in occupier communications;
  • Procurement experience to ensure the right products and services are delivered to maintain the viability of the scheme for the long term.

Why PRS Developers can benefit from appointing Building Operators with a Hotel background on their Build?

  • Separation from building ownership enables both operators & developers to focus on their strengths;
  • Developers are able to focus on managing their property assets to create the best possible return for their investors with the benefits of a focused and more agile business model;
  • Developers are able to leverage the selected operator’s expertise & knowledge against their residents’ wants & needs;
  • They benefit from high public interest and media attention for their buildings on account of the popularity, trust & track record that their operators generate on their behalf;
  • Practical expertise in building operations & management systems, and the efficiencies their business scale is able to generate.

There are many lessons that can be learnt on a practical basis for the PRS from hotel design and construction. It is our belief that if this existing experience is utilised, PRS development design will be more closely aligned to that of a hotel than a residential sale scheme.

Without shifting their mind set towards an operational business model where service is paramount, it may be the case that initial capital outlay may be spent twice over in the operating spend, if it is not considered right from the outset of project planning. These are not considerations that feed into the residential sector on a habitual basis, which is why this adjustment in mind set is required to ensure that BTR is as successful as the housing market needs it to be.

In Conclusion
The evolution of the PRS is a fundamental tenet of future housing supply and one that is underpinned by the property sector’s ability to supply a viable product to the market. We have seen with the success student housing and healthcare how the introduction of alternative asset classes generates specialism and creativity while better addressing the needs of the end user.

From our perspective, the BTR still has some way to go on this but giant strides will be made when real focus is devoted to identifying the tenant of the future and how the development of a PRS-specific operator will aid in this process. Customer focus is paramount to the success of BTR, as is improving service standards. This starts from the very outset of the construction process, but operators with the right, progressive approach to brand will develop a BTR customer base for the long-term that will justify the initial investment in skills and specialist sector understanding.
ENDS