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Build to Rent

Top 10 PRS Cost Considerations

21st Jun, 2018

Since 2010, the Government has focused on institutional investment in the Private Rental Sector (PRS) to boost supply and answer the challenges of the housing crisis in the UK.  The PRS is now the second largest housing tenure in England, having overtaken social housing in 2011.  But still the majority of PRS homes in this country are supplied to market by buy-to-let landlords.

Seemingly the barriers to institutional investment in the sector still exist.   To increase the viability of Build to Rent schemes it is essential to reduce construction costs; this point was flagged in the most recent Government paper on the issue “Building the New Private Rented Sector: Issues and prospects”.

The following paper sets out to identify the key cost differences and drivers between a Private for Sale and Private Rental product.   There are many issues that separate the two housing models – the existing customer experience, the higher levels of occupancy required in the PRS, and delivering an ongoing revenue model.  All of the points are underpinned by build cost and some of the challenges presented by the PRS cost model.

The following 10 points set out the significant cost issues around the Build to Rent model and how we would seek to mitigate them.

 

  1. Building Fabric & Balconies

There is balance to be struck between designing buildings that are aesthetically pleasing whilst navigating the normal planning hurdles in terms of material palette and so on.  A significant amount of money spent on façade ultimately doesn’t necessarily equate to an additional amount of rental income. But with the shift from sales to a largescale rent-based model, considerations around the pace of construction and cost are a key concern as speed to market is paramount.

There is the need to balance the architectural aspect, planning element and greater consideration around durability of materials, their replacement and clearing. The operational considerations should be also be reviewed to include greater provision for cleaning and maintenance. It will come down to a balance between practical access and the aesthetics of the scheme.  But the ability to facilitate the ongoing maintenance of the building will inevitably be much more of a consideration than on scheme with units for sale.

 

  1. Modular Components

As the BTR model expands, there will be growth in the supply chain that services this element of the market and with this will come more specialisation of components.  In turn, this will reduce build time and cost as the sector matures.   At present we already incorporate a range of modular components successfully into PRS schemes including bathroom pods, prefabricated utility cupboards and so on. As the sector evolves and suitable components become standardised, and where there is repetition across schemes, then we will see costs coming down even more in this area.

 

  1. Apartment Fit Out

BTR schemes will generate a significant body of work around the life cycle costing of wall and floor finishes against the refresh period of units.  A key element of this assessment will be the use of durable products that can be easily replaced due to high usage and different occupiers over the lifecycle of the scheme.  This will also involve the substitution of high end fixtures for those that offer more durability, much as we see a balance between practicality and quality in the hotel model.

Standardised layouts will have to be developed for kitchens with white goods supplied via procurement deals.  I would envisage kitchen components coming down in cost as suppliers gain more value via larger deals and as product requirements become better understood.  The same process also applies to bathrooms, where components will have to be adapted, unless a suitable pod-based solution can be produced that would reduce on-site construction time.

In a conventional scheme, build cost budget doesn’t include loose Furniture Fixtures & Equipment Services (FF&E) and a developer would very rarely supply bed, bedside unit, cupboards and so on.   But the BTR model will be very different in this regard, and any scheme appraisal will need to give FF&E due consideration.  The relevant supply chains need to be in place, detailed procurement plans available, and procurement deals need to be assessed in light of costs (and ongoing budgetary concerns).

 

  1. Amenity Spaces & Offering

A significant element for the cost model will be the introduction of different amenities to large PRS schemes and how they affect the revenue generation model.  There needs to be a balance between communal space and the additional facilities that are provided within the scheme to those that are available locally.   Arguably, PRS planners need to work even harder to generate a sense of place and introduce elements that encourage long-term occupancy, while also developing a sense of longer term brand loyalty.  No easy task.

From a cost perspective, a careful assessment will have to be made as to which amenities work for these projects and how spend is allocated to them.  If a gym is introduced to the scheme then units will be lost but this must be balanced with how much revenue could be generated by a fitness centre within the relevant context and is there a supply chain in place to service it?

It is about understanding how flexible these spaces, are and how could they be adjusted to reflect demand in the future.  Will there be demand for a scheme that has a cinema and could it be converted to a crèche in the future, to tailor to the tenant population?  In recognition of the need to adapt to tenant demand, amenity areas should be kept flexible as use may change depending on demand and demographic of tenant base – this should be incorporated in design so that the cost of change is kept minimal.

The need to provide amenity and develop a sense of community via shared resources may well lead to an increase in initial spend and a loss of net internal area, however the need to create a destination and one with a sense of community is paramount to make these schemes work.  It may be that further space has to be freed – such as the roof – to ensure that the necessary amenities can be introduced to the scheme.

 

  1. Communal areas

Proper consideration of the design facets of communal areas will extend the tenants’ demise.  Does adding wallpaper to corridors, increasing expenditure on entrance lobbies, and better touches around the communal areas such as you might find in hotels improve the customer experience?  If it retains customers for the long-term and improves a sense of “brand” then it will need to be in the costs. This will also lead to other considerations such as the introduction of natural lighting in communal areas and furnishing requirements.

This initial outlay may ultimately benefit the scheme by enticing a different kind of end user, and one that is more engaged with the property.  And this carries benefits both in the short and long term, if the scheme can operate at a different pricing level and retain clients for the long term.

The gross internal floor area will have to be optimised to achieve the maximum level of achievable revenue from the optimal mixture of common amenities and living units – this will include increasing the usable space.  The design will have to reach the external façade line to maximise space usage and ensure that the necessary features are in place to sell the scheme for the long-term.  This is a concept that been long-introduced into hotel design and IS MORE frequently being adopted by PRS developers.  The reality is that to make these schemes work in central urban locations particularly in London, the maximum number of units per floor will have to be optimised.

 

  1. Unit Sizes & Mix

Both the mixture of units on the scheme and their sizes will have to be led by higher density schemes to ensure the fundamental business case stacks up.  In a market where land values are as high as they are, then higher unit density will increase the revenue generated per sq. ft. and, ultimately, make these schemes competitive with the residential sales model.  The schemes will have to be designed for functionality and be highly efficient with unit sizes closely aligned to rental value and price points that have been scrupulously researched.

 

  1. Mechanical Electrical and Public Health Systems

The careful adoption of the right technology will ensure that elements of these schemes do not become quickly obsolete as that would obviously impact on their ability to provide a long term solution for tenants.  And, it will also affect ongoing rental value and drive up the cost of refurbishments so they must be futureproofed from the outset.

The introduction of technology such as centralised heating systems, metering requirements, super high speed broadband with excellent connectivity, and dedicated goods lifts will go some way to ensure that obsolescence does not become an issue.  This will take time and experience at the planning stage to ensure all these issues are factored in as it will be hard to change the designs through the planning / development process.

 

  1. Procurement

Across the BTR model, we will start to see better scale in the purchase of components that will facilitate bulk buying and positively impact the costs on these schemes.  Brand standards will have to be put in place, such as a guide to wall finishes and the agreement of a key supply chain.  For the BTR model to work, developers need to be planning for the long term, to be thinking about the pipeline of projects rather than schemes in isolation.

To gain significant competitive advantage and deliver on the necessary housing numbers, developers need to be thinking about seven or eight schemes at a time and benefit from the ensuing economies of scale.  This will facilitate programme wide procurement and service level agreements, all of which we contribute to scalability and a lower cost model.

 

  1. Warranties

The addition of technology to the units and provision of kitchen fixtures will be a key element of client retention and brand building, as I have outlined above; this will have to include extended warranty products on these goods, which will become another significant cost to factor in the planning process. As the operator of the space,  the developer will fall liable for the upkeep of these goods – that is the way many PRS schemes are now going – and ensuring sufficient warranties will minimise that risk but increase costs in the short-term.  Latent defects insurance will also come into play too by which to recover the costs of replacing, strengthening or repairing the site if an inherent defect is discovered.

 

  1. Refurbishment

From our experience in the hotels market, we note that rooms have to be refreshed every five to seven years to ensure the hotel’s market position.  This work would include replacement of fittings, furniture and equipment, minor works, and re-decoration.  But as largescale PRS expansion and brands in this area grow, we would envisage a similar strategy being required in this market.

To this end assessing the whole lifecycle cost – so the assessment of replacements, ongoing maintenance and other costs – will be critical.    Responsibility will sit with the operator of PRS schemes to maintain its standards, so the ability to replace fixtures and fittings, and the durability of these items must be factored in.  Similarly the longevity of the building itself must be maintained as these schemes are a long-term play and any signs of fatigue will impact on the long-term rent-ability of the scheme.  All of these elements will play a key role in developing and maintaining the brand of the schemes and the operators responsible for them.

 

Conclusion

The PRS has changed so much in recent years but our experience of the market would suggest that the real force of change is set for the next few years.  The industry-approach to PRS development is evolving.  Developers are now taking a different approach to amenity space, planning for long-term engagement with the client and, in essence, building brands for the future.

This approach appeals to both investors and tenants alike, but for it to be truly successful does require it will change the approach to both development costs and operational costs.  Ultimately the consumer is already asking more questions of PRS developments and developers need to be ready to answer them.  A progressive approach to these schemes is the only way forward and understanding the investment required to go alongside this approach is critical to success.