Autumn / Winter 2014

SHAPING the PRIVATE RENTED SECTOR

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Delivering the Private Rented Sector

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Welcome to the latest biannual PRSupdate publication.

This issue takes a look at the some of the great work that’s taking place across the Private Rented Sector (PRS). We are no longer looking at theory.

These articles are all about practice, all from organisations active in the PRS spanning; financing, land acquisition, master planning and space planning through to construction, asset management, branding and building communities from the ground up.

I’m grateful to the following organisations for sharing their insight; The PRS Taskforce, Lend Lease, GVA Financial Consulting, Allies and Morrison Architects, Essential Living, Winckworth Sherwood, Small Back Room, RTKL and Get Living London.

All of the authors within these pages are delivering a new Private Rented Sector, one which offers customers institutional-grade homes, certainty in their rental proposition and hotel-grade service standards.

The PRS is rapidly evolving and I’m proud that Young Group is at the forefront of this evolution; involved with the largest PRS projects in the country and working with asset owners, undertaking the letting and management operations of their assets.

I hope you find our latest collection of articles interesting and informative. Remember to regularly take a look at prsupdate.co.uk to stay on top of the latest PRS news, comment, research, opinion and guest articles.

5 Funding Private Rented Sector Housing Andrew Screen GVA Financial Consulting

7 Land Acquisition In The Private Rented Sector Darryl Flay Essential Living

9 Designing For The Private Rented Sector Artur Carulla Allies and Morrison Architects

10 Can The Planning System Help Or Hinder The Creation Of A Large Scale Private Rented Sector? Karen Cooksley Winckworth Sherwood

12 A Smarter Design For A Smarter Home Todd Lundgren RTKL

15 Delivering The Largest Private Rented Sector Scheme Alan Bates Lend Lease Construction

17 Operating Institiutional Private Rented Sector Assets David Mackenzie Young Group

20 Private Rented Sector Place Branding Tim Lewis Small Back Room

22 Engaging A New (And Unique) Community Jatin Patel Get Living London

23 Investment Analysis And Performance Reporting Dominic Martin The PRS Taskforce

Welcome

Neil Young ACMA CGMA MARLA

Chief Executive OfficerYoung Group and Young London

nyoung@younggroup.co.uk

Inside...

For comments, feedback and suggestions please contact:Michael OakesDirector of CommunicationsYoung Groupmoakes@younggroup.co.uk

Private Rented Sector Operations

SHAPING the PRIVATE RENTED SECTOR

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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 benefiting from our robust operational lettings and management platform.

We’ve spent many years building our reputation, let us help you enhance yours

Reputation is everything in the Private Rented Sector

Neil YoungChief Executive Officer

David MackenzieDirector of Asset Management

020 7531 7700 | younggroup.co.uk

Private Rented Sector Operations

Funding Private Rented Sector Housing

The emergence of a significant Private Rented Sector (PRS) development and funding market has been driven initially by the public sector through various initiatives, including the formation of the Government PRS Taskforce and followed closely by investors. These early investors included M3 Capital Partners, M&G, Apollo, Grainger, AGP, Qatari Diar, Akelius, Oaktree and Sigma, with many following suit in the last 12 months. On a monthly basis new investors are entering this market with c£500m to invest, all seeking PRS developers and suitable investment opportunities in the UK’s top 35 cities.

Andrew ScreenManaging DirectorGVA Financial Consulting

gva.co.uk

Funds and has little track record as an institutional investment class.

Essentially the development period of PRS represents a higher investment risk and funding is generally undertaken by Private Equity, Banks or Opportunistic Funds for a higher return on their funding. Once the income on the completed units has stabilised (two to three years) the investment risk is reduced and is of interest to long term investors.

The Funding Deal

There is a significant amount of debate regarding the discount at which PRS should be sold compared to open market private sale housing and how this impacts on developers developing/selling for PRS purposes. There are typically three ways in which PRS funders/investors approach the funding of PRS housing or developments, these essentially are:

• The purchase of existing stock/units

• The purchase of units to be built by the developer (forward purchase)

• The funding and purchase of units to be built by the developer (forward funding)

When an investor looks at purchasing a building that has been completed or is soon to be completed, the investor will apply a discount to the open market sale value of each flat/home on the basis that the purchase is a bulk transaction (i.e. purchasing 200 units not one open market unit). This will also be the case where a forward purchase is agreed (i.e. the funder agrees to purchase all the units once the development has been completed). However, the discount to open market will be higher because

• Government• Annuity Funds (Pension Funds)• Private Equity/Opportunistic

Funds• Banks • Local Authority Public Works Loan

Board backed loans

Banks tend to provide funding for the development period only, seeking to exit within a three to five year period and generally wish to see an agreed exit route prior to funding.

The Government’s Build-to-Rent fund is also primarily for the development period, providing funding (debt & equity) for up to 50% of the development costs with an anticipated repayment within five years and a longstop date of March 2025.

Private Equity and Opportunistic Funds generally have a maximum investment time period of six to seven years for PRS and will fund through the development period, stabilisation and finally exit, with each of these stages comprising approximately two years. The Private Equity and Opportunistic Funds will usually sell to a pension fund, however they may also seek a bond issue, securitisation, Real Estate Investment Trust or listed vehicle as an exit. This exit route may not be transparent to the developer who has obtained the funds, as this may be wrapped up in the overall fund’s objectives and may include the exit of multiple PRS investments that the fund has made.

Pension Funds provide the best source of funding for the PRS as they seek out long term (25+ years) income streams which are linked to inflation (rental increases). However, Pension Funds are risk averse and generally shy away from development/construction. The UK PRS is a new form of investment for Pension

“The UK PRS is a new formof investment for Pension Funds and has little track record as an institutional investment class.”

Sources of Funding

The Government provided the initial PRS market stimulation with the Build-to-Rent fund, which provided debt, equity and mezzanine funding for the development of PRS stock. This was followed by the announcement of the Government’s Housing Debt Guarantee Scheme providing 30 year guarantees to banks for PRS debt funding. The amount of funding available for new PRS development is estimated at approximately £10bn from private sector funding sources and £10bn by way of public sector funding initiatives.

The type of funding offered, duration/term, amount and when it is available, all depend on the party providing the funding. The funders in the PRS market include:

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the funder may have to commit to purchasing the units up to two or more years in advance and may be exposed to market fluctuations and a cost of capital.

These discounts to open market value will vary depending on the location, number of units, type of product and the developer’s ability to deliver. The discounts to open market value will typically range between 6% and 15% and are unlikely to exceed 20% as this would leave the developer with very little return for undertaking the development risk.

internet etc) less the operational costs and voids (usually between 25% to 30%) leaving the net income. This is then divided by the cost of the scheme or unit to reflect a net annual yield/return on investment.

The return required by the investor will depend on the type of product (upper or middle market) and the location. It typically varies from 1% to 7% with the highest investor demand in the 4% to 6% range. The investor return is calculated based on the annual net yield and the capital growth (HPI or yield based) in the property providing a total return (typically of 9% to 10%).

There is a significant level of funding pursuing the PRS development market and property developers with the right product in sought after locations will be in a strong negotiating position with funders.

Public Sector PRS Development and Funding

In the last six months we have seen a phenomenal increase in the number of local authorities pursuing PRS development on local authority owned land, either in joint ventures with developers or by undertaking self-development. Some of the drivers for this development are:

• The lack of housing development being undertaken by the private sector in the boroughs

• Registered Providers’ lack of housing supply in the boroughs

• To create a better rental product/market

• Regeneration of town centres• To generate revenue income for

the local authority

The primary driver is that local authorities can use PRS rental income to provide themselves with a revenue stream on land which they own and which is often underutilised. These revenue incomes have become more and more important to local authorities as the Government places deeper cuts on their finances.

“Local authorities can usePRS rental income to provide themselves with a revenue stream on land which they own and which is often underutilised.”

“In the last six months wehave seen a phenomenal increase in the number of local authorities pursuing PRS development on local authority owned land...”

A further discount is applied by the investor to the open market value should the developer require the investor to fund the PRS units during the construction period, this is because the investor will be exposed to development/construction risk and will also require a return on funds drawn-down. However, this seldom results in a further discount to the open market value as the cost of finance during the construction period is normally taken into account in the construction costs in the development appraisal.

While funders will look at the purchase/costs per unit they are primarily interested in the net yield/return from the development as this represents the return to their investors. The net return is calculated by taking the gross rental (including income from other services,

The local authority typically sets up a Special Purpose Vehicle to develop the units with the management and operations being out-sourced to specialist management companies. The local authority borrows the funding from the Public Works Loan Board (20 year fixed funding, at approximately 4%) for the construction of the units and can make a revenue income return from the difference between the rental income from the units and the cost of borrowing. Other variations include private sector funding and ground rental mechanisms, which can all provide similar, albeit lower, income streams.

In conclusion, there are various forms of funding available for PRS development and investment, however there is a significant shortage of “oven ready” development sites particularly as investors wish to commit large capital investment over multiple sites.

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Land Acquisition In The Private Rented Sector

Rising house prices, demographic change and the tight mortgage market have led to a doubling in the number of renters in the UK over the last decade.

While no one doubts the UK’s penchant for ownership is about to change any time soon, there’s a huge opportunity in unlocking the kind of institution-backed sector that supports housing in the US. Replacing the reputation for poor standards underpinning the buy-to-let sector could, however, redefine the way the public approaches renting, while creating an exciting new asset class for institutional and, eventually, retail investors.

A growing number of large investors have been posturing on the sidelines for years and, over recent months, the talk has turned to action with major schemes in development across London and Manchester.

leases are behind us, and this has driven investors on both sides of the Atlantic to embrace alternative sectors, where future income uplifts can be secured by new drivers of demographic demand, which are often less volatile than that in the banking or retail sectors.

In short, in a recession people will buy fewer products in shopping centres, pushing down retail rents – but those same people will always need somewhere to live. This is something America has been doing for decades, with the UK failing to catch up. However the tide has now turned and we, together with our backers M3 Capital Partners, are well on track to meet our target of delivering 5,000 private rental homes across London.

However, careful selection and acquisition of sites is still fundamental for successful Private Rented Sector (PRS) development; location remains key.

For drive-to sites – such as self-storage or out of town retail – the restrictions around location are far less tight than with residential property. While people are able to drive a moderate distance to buy their electrical goods, renters particularly prioritise convenience over all else.

When we talk about ‘rewriting the rules of renting’, what we mean by this is offering a product designed for time-poor urban dwellers who want to avoid the traditional issues associated with renting. They want to use their spare time productively, socialize with friends and enjoy where they live. Being close to transport links is a crucial part of this – and it’s this that’s driven our land acquisition strategy.

From our development in Maidenhead – which will be at (what was) the western end of Crossrail – to Archway and Swiss Cottage in North London, Helix and Three Colts Lane in East London, and other projects in Croydon

Darryl FlayChief Executive OfficerEssential Living

essentialliving.uk.com

Helix at Canary Wharf is a landmark project with a full range of on-site facilities.

“The good old days of 20year leases are behind us, and this has driven investors on both sides of the Atlantic to embrace alternative sectors...”

One of the much-discussed barriers that has delayed the entry of UK institutions into the market has been the lack of available stock and the relatively low yields available from buying an ‘off-the-shelf’ product. This invariably means paying a mark-up to a developer that comes straight off your returns.

Traditionally, institutions – who are typically focused on income – could pick up shopping centres or offices and gain double-digit returns in a boom market. But the good old days of 20 year

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But building in this extra space, and improving the durability of developments – to reduce future maintenance, and to make a quality product where people will want to live for decades to come – increases upfront development costs.

This means going toe-to-toe with traditional housebuilders who boast a wholly different business model to ours is tough. And this has certainly been another factor in keeping people from the market place who, if everything was equal in the land market, may have come to the table with developments. The ability of PRS developers – who focus on generating returns over the lifecycle of the development, not through an immediate sales process – to compete is often restricted by the soaring price of land.

This has led to us being more entrepreneurial, taking on sites without planning. We’ve been fortunate to have backers who understand this need – but this is an aspect of development that many UK institutions are not prepared to take on. By taking on a site pre-planning the potential upside from the value created can then be realized in the returns yielded over time. And this is a vital part of our business – alongside amenity spaces and services that will make our developments attractive to tenants.

For those unwilling to take sites pre-planning, the model will be difficult,

and Greenwich, we’ve focused on targeting areas that have pent up demand for housing, but also boast superb connectivity.

But just as there’s skill in land assembly, there’s also a skill in capitalising on the value of a site, not just through convenience and external design, but also through maximising tenant enjoyment and loyalty. Recognising that the way people live is changing; we have developed brand pillars set around the provision of tenant services and communal space.

In the US, the hugely successful multi-family housing sector model, which accounts for 30% of accommodation, lives by the simple rule that ‘service is king’ in finding and retaining tenants – and subsequently maximizing returns. In the UK it can only be likened to the hospitality sector, with a concierge, on-site maintenance and responsive apps to support how people interact with the business.

but there is a growing body of support at various levels of government to encourage more institutionally backed development – in recognition of the part it has to play in solving the housing crisis, and in providing a much needed new housing tenure.

Admittedly, local planning guidelines still need to be stronger, and local authority financial viability models need to reflect the fact that building for long-term rent is not the same as traditional housebuilding. In return, PRS developers can agree rental covenants guaranteeing that such properties will be rented out for a minimum term and provide families with the security that comes from long-term tenancy agreements.

The Mayor of London, and a growing number of councils, support these ideas already – if we get it right it would create thousands of new homes with real long-term owners.

I’ve had the pleasure of working with some of the industry’s finest and this certainly amplified the intuition that we have for a good opportunity. Ultimately though, it’s about having a very clear sense of brand direction; knowing what your customers will want ultimately drives where you need to be positioned.

If you’re in the business of buying land to trade then the end user matters not, but as a brand seeking to manage rental homes over the long term, we’re focused on the full lifecycle.

“There is a growing body ofsupport at various levels of government to encourage more institutionally backed development...”

“Excellent service andamenities will contribute to future rental uplifts and reduced tenant churn.“

Our own vision is to create a brand recognized for quality, and communal areas and service are an integral part of this. Where a conventional block of apartments would have a penthouse, we’re building a common lounge to be shared by residents. Similarly, we’re building gyms, meeting rooms, business areas, quiet corners and outdoor roof gardens/decks. Excellent service and amenities will contribute to future rental uplifts and reduced tenant churn.

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Designing For The Private Rented Sector

of residential layouts. This is for three reasons:

• Firstly, occupational habits and behaviour are not significantly different between tenants and homeowners

• Secondly, developers require that flats are suitable to be transferred to the sales market in the future

• Finally, PRS flats are subject to the same policies, regulations and space standards as other for-sale residential developments

There is, however, a significant difference in the design briefs we receive for PRS schemes. This is related to communal areas, including entrances, amenity spaces and back of house facilities. These spaces are perceived as an opportunity for PRS schemes to differentiate their offering, present added value for their tenants and retain them by instigating a sense of community. We anticipate this trend will only increase as a number of PRS developers and operators in the UK develop recognisable brands that are closely associated with the provision of services, facilities and amenity spaces.

This is already the case in the USA, with brands such as ‘AVA’ and ‘Avalon Communities’ in the East and West Coast. In a recent visit, as a prospective tenant, to PRS developments in New York, including AVA’s latest project (‘AVA High Line’), the importance of communal spaces became apparent as viewings typically devoted more time to communal areas than the flats. There are good reasons for this.

A survey of PRS tenants, conducted by YouGov, identified ‘proximity to friends and family’ as one of the three most important criteria “with widest potential to add value”. Unsurprisingly, there

Artur CarullaDirectorAllies and Morrison Architects

alliesandmorrison.com

In recent years, our designs have responded to the increasing housing demand, rising land values, new policies and regulations, changing market preconceptions and influences from overseas. Many of these changes are, to some extent, either the cause or the consequence of an increase in housing development densities and the consequent shift of home building from houses to flats. While this trend developed long ago, it was only four years ago that the Mayor of London’s Housing Design Guide (LHDG) was first published. This document offered the first spatial criteria for residential developments since the abolition of the Parker Morris standards in 1981.

Today, flat layouts in the capital are strongly influenced by compliance not only to the LHDG, but also the local authority’s own requirements, Lifetime Homes, Code for Sustainable Homes and other standards. However, the attention that these standards have brought to the size, spatial qualities and environmental sustainability of flats has rarely extended to communal areas, beyond the guidance on the adequate provision of amenity space. It is only the recent rise of Private Rented Sector (PRS) developments that has put communal areas in the spotlight.

As architects, we are often asked about the particularities in the design of flat layouts for PRS accommodation. These are in fact minimal; after all, the rental market has traditionally been based on the very same stock of homes designed for sale. Our clients in PRS developments have developed a stronger interest in aspects of design associated with durability and maintenance, their unit mixes favour studios and one-beds and larger units are designed for sharing. However, these changes have had a limited impact on the design

is correlation between the number of personal relationships amongst tenants and their likelihood to remain in the community. Consequently, PRS developments have focused on the provision of congregational spaces as a commercial strategy to both attract and retain tenants. These spaces are designed for tenants to develop social bonds with their neighbours as well as to invite their guests to. If successful, these spaces have the capacity to turn tenants into ambassadors and friends and family into prospective tenants.

The design of these spaces is as stimulating as it is challenging. As few of us have lived in large PRS schemes it is difficult to draw lessons from our own experiences. There is also a lack of established benchmarks or even broadly acknowledged successful precedents. Most of the congregational spaces of the PRS schemes I visited in New York, for instance, relied too much on the provision of technological gadgets and playful furniture. It was all too apparent that those spaces would soon become obsolete and out of fashion, requiring re-design and further capital expenditure. When designing such congregational spaces we might learn from successful hotels, members clubs and educational buildings.

If adequately designed, congregational spaces in residential developments could play a strong role in the development of communities, mediating between public and private spaces. The PRS ought to give these spaces the attention they deserve, it is in their interest and, if it does, the shift from home ownership towards the private rental market could prove as transformational in design terms as the previous shift towards higher density.

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Can The Planning System Help Or Hinder The Creation Of A Large Scale Private Rented Sector?

Residential developers who build for sale have, for many years, voiced consistent concerns about the length of time it often takes to navigate the planning system and achieve the consent required to build much needed homes. Inefficiencies in the processing and determination of applications can result from a lack of resources or experience at officer level. There is frequently a lack of political will or leadership to help communities understand the need for more homes to be built in their locality and the wider social and economic benefits which will result. Each local authority has different policies and there is a frequent tendency to apply planning law and national policy in a different way.

quality and in the right places to suit the needs of those who cannot afford, or choose not, to own their homes but do not qualify for subsidised affordable housing.

There is inconsistency between local planning authority views on the PRS, which does not fall neatly across traditional party lines. Some appear to believe that it is simply a new form of affordable housing tenure and have discussed how best to regulate it as such. Others have suggested that PRS units should be a different use class from the normal C3 dwelling – which is not favoured by developers, operators or funders who point out that non-special needs affordable housing is not classified differently from private residential use and who need the flexibility of being able to retain the ability to sell units on in the future.

There may need to be regulation to ensure that PRS units are used as such for a minimum period, for example where this tenure will meet a particular housing need or to ensure that there is a sufficient scale of private rented housing available, but this can readily be achieved by the usual mechanisms of s106 planning obligations or planning conditions. In both cases, care will need to be taken to ensure that any restrictions imposed are framed in the context of very different valuation requirements from those which local planning authorities have used in dealing with development for sale and the calculation of the affordable housing which should be provided as part of those schemes.

There will also need to be recognition by local planning authorities that, whilst there is not a ‘one size fits all’ PRS model, many of the schemes which are now coming forward are purpose built

for rent and will often be laid out to a different specification than flats which are built for sale. There will need to be careful reasoned explanation provided by developers and operators of PRS schemes and their specialist architects, to enable authorities to be flexible in relation to their current adopted design standards and policies from a position of understanding.

A potentially exciting new proposal by which the planning system could assist the development of the PRS at scale was launched on 12 June 2014 when the Chancellor (in his Mansion House speech) announced that the Government would be “removing all obstacles that remain to development on brownfield sites” and that the Government would be “putting local development orders on over 90% of brownfield sites that are suitable for housing”.

As part of this initiative a prospectus has now been published by the Mayor of London (MoL) in relation to the establishment of 20 Housing Zones (HZs) across London. Central Government will also be creating ten HZs outside London. In the foreword to the Mayor’s prospectus, written jointly by Boris Johnson and the Chancellor of the Exchequer, it is expressly stated that “All this builds on the steps we’ve already taken like our reforms of the planning system... improving the private rented sector and building 100,000 affordable homes in London”.

HZs were first mooted in the draft Housing Strategy published by the MoL in November 2013. HZs will be areas where house building will be accelerated by a variety of funding and policy levers with the primary aim of the maximisation of new housing supply. Each HZ will be expected to

Karen Cooksley Partner - Head of PlanningWinckworth Sherwood

wslaw.co.uk

“There is inconsistencybetween local planning authority views on the PRS...”

Successive governments have tinkered with primary and secondary legislation, and latterly made more radical changes to both law and national policy, in an effort to speed up both policy making and decision taking at a local level. In recent years the Coalition Government has given special emphasis to the need for the construction and provision of more homes of all tenures, not just to serve spiralling housing need, but also to kickstart the recovering economy.

With the resurgence of interest in Private Rented Sector (PRS) housing come concerns that this tenure may also experience problems with planning. This at a time when there is widespread recognition that the PRS has a significant part to play in providing homes of the right size,

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deliver at least 1,000 new houses and will have a lifespan of up to ten years. Overall the MoL expects the 20 HZs to deliver more than 50,000 homes.

The MoL’s draft Housing Strategy originally indicated that the HZs would be located in the 38 Opportunity Areas. However, other locations will be considered if they meet the criteria set out in the Prospectus. The principle idea behind HZs is to stimulate construction activity in areas where the market is as yet unable to support large scale development. Only four London boroughs recorded more than 1,000 residential starts last year and the aim is for there to be a greater volume and spread of housing development across London.

The MoL is committing £200 million of capital funding from GLA housing funds to the HZs and a further £200 million will be made available by Central Government. The capital funding from the GLA will be recoverable funding and therefore will be available either by means of a loan with a commercially calculated interest rate or through an overage or profit share type arrangement. If this is not possible the MoL will consider making investment available through a grant, but such investment will have to be state aid compliant. The Central Government funding will also be made available as capital funding but will only be open to private sector organisations. Registered Providers will be entitled to apply for the Central Government funding.

The Prospectus states that the funding for HZs cannot be allocated to revenue expenditure. However, the funding can be made available for a wide variety of capital expenditure purposes including infrastructure/gap funding, land remediation and site preparation,

affordable housing delivery or supporting home ownership. It is also suggested that pre-sale guarantees could form part of the package of financial measures made available within a HZ.

The Prospectus states that HZs are a new approach to housing delivery and that some legislative or policy changes may be required in order to maximise their potential and effectiveness. The Prospectus highlights the use of Local Development Orders (LDOs) by the boroughs. It concedes that LDOs have so far been little used in London and it is clear that the GLA will expect the boroughs to promote LDOs within the HZs. The Prospectus also suggests that the MoL could acquire land in HZs using compulsory purchase powers if necessary. The MoL would then work with the borough and other development partners to draw up a master plan for the zone and even issue outline planning permission for the construction of new homes. This could herald the granting of powers to the MoL to make Mayoral Development Orders which presumably would take the place of LDOs.

A borough with an area designated as an HZ would need to demonstrate how it is able to adequately resource and streamline its planning function. It would be supported by the GLA in both plan making and development management, in return for which it would need to meet agreed outputs. There will also need to be a clear demonstration that once permission has been issued it will be capable of speedy implementation, for example by ensuring that reserved matters and pre-commencement conditions –which often take months or even years to clear down – are agreed in advance. It is likely that some HZs will cross

borough boundaries and the GLA’s support there might include bringing together the different authorities’ planning teams to ensure co-ordination of approach and decision making.

Statutory consultees can often delay or impede decision making – as a result of the time taken to respond to planning authorities’ queries or in surveying or implementing infrastructure works – it is proposed that the GLA would be willing to act as mediator or broker to improve performance in that regard.

A further suggestion in the Prospectus is that boroughs who want to encourage development and minimise planning risk and delay might consider an accelerated planning process. This would mean treating a site as though there was a planning application for the desired type of development, e.g. large scale PRS, and undertaking all the necessary preparatory work that such an application would involve. This would enable any subsequent application to be processed much more quickly. Plainly, there would be costs involved in that – which a developer would no doubt be asked to reimburse – and there would need to be attention paid to the ability of developers or operators to rely upon the work undertaken by the authority’s professional teams in the preparatory works.

There is specific support for PRS development to come forward in HZs, which are said to be areas where the planning system would encourage PRS “in order to increase the pace of development and add to the range of housing options available”. It is noted that there would normally need to be planning covenants – s106 obligations – to ensure that such homes are held as PRS over ‘a reasonable timescale’.

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A Smarter Design For A Smarter Home

Over the last decade, the proportion of households in the Private Rented Sector (PRS) has risen from 10% to over 17%. By 2016 it’s expected that one in five households will be renting privately. The average age of tenants has also increased, with the fastest growing group of private tenants now between 35 and 44 years old. Of these households, between 25% and 33% are families with children who, broadly speaking, are looking for secure accommodation over a long period of time to lay down roots in the local community.

There is also a growing community of young people – postgraduates from university – who have grown accustomed to the quality of accommodation and service from the purpose built student housing market, and who find the current offer in rented accommodation sorely lacking.

Todd Lundgren Regional Practice Group Leader RTKL

rtkl.com

Social Cohesion

Social benefits, such as amenities and communal spaces, should be incorporated to provide tenants with an environment which facilitates their lifestyle from the second they step into the building to the moment they enter their personal living space. This holistic way of thinking is built on a careful review of the design which puts the experience of the end-user at the forefront and encourages residents to feel like they are renting the entire building, rather than just a private dwelling.

Typically, these developments consist of 150+ units, to allow enough scale to provide the level of management and service offering that tenants will demand as part of the lifestyle offer. A diverse mix of dwelling types should be included, incorporating studio, one, two and three bed apartments. This ensures that supply meets demand and provides the opportunity for residents

to move within the same development as their circumstances change over time.

Communal spaces provide tenants with an environment that fosters opportunities for social interaction and helps generate a greater sense of community.

“...encourages residents tofeel like they are renting the entire building, rather than just a private dwelling.”

Naturally, this presents a new challenge to us as designers operating in the Build-to-Rent segment of the PRS. But it also brings many opportunities to create forward-thinking developments with long lasting value which encourage both social cohesion and convivial ways of living.

While ‘for sale’ residential properties are built as viable long term investment opportunities, the Build–to-Rent developments need to be based on a tailor-made model to fit the product for a very different end user.

“Social contact isemphasised through the physical design of these environments...”

The optimum balance between unit mix and overall level of amenities is delivered following a detailed upfront assessment of who the target tenant is for each development. This allows us to accurately deliver completed projects which provide the lifestyle and community aspect of living that is so important to the Build-to-Rent segment. Social contact is emphasised through the physical design of these environments, with extensive common facilities such as open spaces, courtyards, club rooms, exercise facilities, working spaces and landscaped rooftop terraces.

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Spatial Efficiency

In personal dwellings, shared space is as equally important as it is in the public realm. To accommodate this, we place a great deal of emphasis on open plan layouts which, through good design, can achieve all the functional space requirements, whilst achieving our goal of maximising the quality of space and being able to explore alternate unit sizes that still meet or exceed the applicable design standards for specific living areas of the apartment.

This set up sees shared living spaces occupying the central location, with bedrooms (usually equal in size) clustered around and served from the central space. These large central spaces also enable vast open spaces which flatter tenants’ sense of distance from the moment they walk through the door.

At RTKL we refer to this concept as ‘visual distance’. More than simply creating

an initial ‘wow factor’, which helps generate sales, visual distance provides tenants with ongoing benefits, such as a better feeling of space, improved air quality, natural views, greater volume and added storage space. Floor to ceiling bay windows allow for ample natural daylight, which reduces the need for artificial lighting and helps the development stay energy efficient.

We also maximise the number of units served per core and aim to focus more dwellings around lift and stair cores. This provides more opportunities for social interaction and, if combined with well-designed areas of circulation, helps foster a greater sense of community throughout the entire building.

Circulation spaces can also be an opportunity to facilitate social interaction amongst tenants, and should be generously provided, with access to natural light or exterior shared terraces wherever possible.

As ever, good design should underpin every decision, with optimisation from a spatial efficiency perspective embedded at every level. Striking the right balance between structural sensitivities, layout design and building systems efficiency is crucial in delivering a cost-effective development that drives investment and creates desirable places to live.

Close attention should also be given to ongoing management responsibilities to ensure that future developments provide adequate capacity for the provision of high-quality service through the use of automated technologies, which respond to the needs of the tenant and enable new developments to fall in line with future economic factors and governmental actions such as the need for improved energy efficiency. The involvement of the operator or manager should occur at the earliest phases of the design process.

‘Visual distance’ provides tenants with benefits such as a better feeling of space, natural views, and improved air quality.

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Automation in the Private Rented Sector

As governments around the world continue to push for more efficient electrical grids, sophisticated software systems that intelligently manage electricity usage in large-scale buildings will enable developers to save money by adjusting their power demand in relation to available energy supplies. This means consumption will follow production.

Efforts to increase energy storage in buildings are already in place across the United States with the STORAGE 2013 Act. Whilst here in the UK, the recently introduced Energy Efficiency Directive will force large companies to conduct regular energy audits of all aspects of their business in an effort to improve economic growth through smarter energy use.

For a developer of large scale PRS projects, this will mean facilitating the means to collect data on everything from ventilation systems and water pump activity to temperatures throughout the building. Automated solutions will help to advance sustainable development by minimising environmental load with systems that are only used whilst in use.

significant savings on their energy bills, with new tenants attracted by the prospect of living in a cost-effective and energy efficient home.

Companies like Apple, Google and Samsung have already released home automation platforms that enable users to automate repeated actions across a variety of smart devices and applications. From a single hand-held device users can connect to cleaning systems, smoke and carbon monoxide alarms, health tracking products and air quality monitors.

Of course, home automation systems have been around in luxury homes for decades, but until the introduction of the iPhone, automated technology never really took off. Now people are used to having a single product in their hand from which their entire lives can be easily controlled.

Coupled with the superfluous nature of an Internet-driven social culture, the standardisation of information technology and the globally-distributed digitalisation of services and products, the need for innovation in the design of home automation has never been so prevalent.

Innovation in PRS building design is equally important if we’re to create intelligent homes which support the demands of a different kind of tenant in an ever evolving market. The challenge for architects, planners and developers will be to incorporate a conscientious juxtaposition of social value and spatial efficiency, whilst providing the adequate capacity for the future integration of technologies. As homes become more intelligent, so must design.

Home automation can make a resident’s life easier. It also enables improved efficiencies when managing PRS homes and developments.

“Innovation in PRS building design is equally important if we’re to create intelligent homes which support the demands of a different kind of tenant in an ever evolving market.”

On a smaller scale, automation systems installed within personal dwellings, such as lighting systems and thermostats, will allow tenants to make

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Delivering The Largest Private Rented Sector Scheme

Since 2007 Lend Lease has been working on the development, design and delivery of the largest residential project in the UK. The delivery of East Village for phased occupation from November 2013 builds on the success of delivering the best ever Athletes’ Village, that was occupied by up to 17,000 athletes during the London Olympic and Paralympic Games. After having completed all pre-Games works in time for LOCOG to apply the finishing touches we returned to the site, after the excitement of the Games, in November 2012.

Designed For Legacy

The challenge ahead was immense. To decommission all 2,818 units from Games-use and refurbish them (we used the phrase ‘Retrofit’ for this phase) for legacy occupants. Adapting properties that had been designed to accommodate almost twice as many people as that would ultimately live there was no mean feat. The sheer scale of the logistics operations, quantities of materials needed and labour involved in order to meet the programme requirements was unique in the residential refurbishment arena.

A critical success factor to the Retrofit phase was the foresight in designing for legacy with a temporary interim use as the athletes’ accommodation. This greatly minimised the impact and level of alterations to be made during the Retrofit phase. Catering for such high usage during the Games also tested the mechanical, electrical and public health commissioned systems. Though all kitchens were installed during the Retrofit as the kitchen areas had been used as additional bedrooms during the Games.

Alan BatesExecutive General ManagerLend Lease Construction

lendlease.com

Unprecedented Scale

East Village is set out across 11 distinct residential ‘plots’, each containing between four and seven ‘blocks’. The scale of each plot ranges from 120 units to 318 units. We contracted with Tier 1 contractors across five of the plots whilst six were delivered by Lend Lease as Construction Manager.

This approach, a continuation of the pre-Games approach, helped to manage the delivery risk during what was a very challenging programme. By dividing the works in this way, and further sub-dividing the works across the construction management plots, across several key contractors, we were able to provide an efficient approach to resourcing the necessary workforce and skill sets from across the industry.

At the peak of activity we had a daily workforce of 2,200 on site, working a cumulative total of approximately 6,300,000 hours. Taking into account the different trades and the ‘churn’ of different individuals who worked on the project, a total of 6,000 workers played a part in the Retrofit project. Lend Lease is extremely proud of the fact that the site remained one of the safest construction sites in the world during both the pre-Games works and the Retrofit phase. This record was acknowledged nationally under the Considerate Contractors awards scheme in April 2014, when the project secured its fifth Gold medal – an unprecedented achievement in the industry.

During the 19 month Retrofit project our peak month for handover of units was March 2014. We handed over, ready for occupation, 941 units in a 21 day period – an average of 45 units per day. Over the 19 months of work we

have laid the equivalent of 40 football fields of carpet and timber flooring and, if piled on top of one another, we’ve used enough paint cans to rise six miles high!

Stakeholder Approvals

But what of the approach that has been embarked on to ensure that all units are fit for purpose and delight their final occupants? Of the 2,818 units, 1,439 are homes owned by Qatari Diar Delancey (QDD) and managed by Get Living London under their Private Rented Sector (PRS) initiative. The process for pre-handover inspections and approvals is thorough and painstaking. In addition to an Independent Certifier (IC), QDD utilises the services of a third-party inspector who makes any representations to the IC. The final test is the “Owners Walks”, where representatives of QDD walk through the units to be handed over so that they can verify themselves that they are happy with the end product. Consistency in the specification and quality of the end product is, of course, of paramount importance.

With a seven year project, which had an interim use as the Athletes’ Village, a robust change control process, followed by an in-depth inspection and approvals regime, has been essential. With approximately 7,200 separate rooms, 5km of corridors and common areas under Get Living London control and 70,000 documents and certificates to secure, the scale of inspection and review was immense.

By completing 49 units early we were able to set benchmarks to measure compliance with specification and quality standards. These units covered all tenures and types across the site and helped to highlight any discrepancies

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between what was provided and what was required. Having this process in place was instrumental in securing a smooth handover.

The original foresight at the outset of the design and development of East Village has certainly stood the test of time. Each plot has a unique architecture, a carefully considered point at the outset, to ensure an aesthetically pleasing mix of designs. With the majority of plots being designed as perimeter blocks around an internal podium, on a standard chassis principle and ‘tenure blind’, the end product has worked well for both the PRS and affordable units.

The variety of unit layouts across the site provides diversity whilst sticking to a consistent specification when buying materials for the build will help to provide future maintenance efficiencies. The overall scale of the development also provides opportunity for such efficiencies. Another advantage of delivering such scale, essentially all at once, is consistent product availability. Take the kitchens for example; the majority of them were manufactured in Italy and we were able to bulk buy them to provide us with greater cost efficiencies due to economies of scale.

The PRS is certainly embracing the demand for large scale projects. As clients, contractors and stakeholders consider the outcomes of the early PRS projects, from a product and operational viewpoint, feedback from tenants is key.

Typical room being stripped back after the Games, to create the final legacy layout.

A completed Private Rented Sector home in East Village.

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the topic of an article in its own right in the Autumn/Winter 2013 issue of PRSupdate), release phasing, marketing strategy, live reporting and analysis, applicant processing, contracts and compliance. Not to mention ‘resident relations’, which spans; property management, community and stakeholder engagement, building management and so on... The list can seem endless.

Clearly there is much to consider, and all with an overarching focus upon maximising asset value and enhancing income. With so much to consider, it’s crucial to have robust reporting mechanisms in place to enable those at the helm to take fleet-footed decisions on a day-to-day basis. It is this insight, and understanding the nuances of day-to-day operations, where real value is added.

For example, the balance between supply and demand for unit types

should be understood at a granular level in almost real time. It’s the role of the operator’s Asset Managers to spot layouts that are proving most appealing, or specific aspects and views that capture the imagination of applicants, and to flex the pricing strategy algorithm accordingly.

Similarly, if a large cohort of applicants is identified from a specific industry sector, the Asset Manager evaluates whether that represents a risk or an opportunity, before working with marketing colleagues who can adjust campaign activity accordingly.

Balancing Commerciality

For many investors, having a consumer as a customer can be a new experience and there can be a temptation, certainly during the initial occupation phase of managing a new PRS development, to over-service. It seems the natural thing to do. And whilst it’s vital to get

David MackenzieDirector of Asset ManagementYoung Group

younggroup.co.uk

Operating Institutional Private Rented Sector Assets

With any businesses’ strategic planning, it’s vital to understand what success looks like at the outset. The Private Rented Sector (PRS) is no different.

When investors are scoping PRS investments, the operational aspect is just as important as the investment strategy. How will the assets be managed, the rents set, residents sourced, the homes maintained, refreshed and further down the line, refurbished? Asking – and answering – these questions at the outset informs the operational strategy, goes some way to informing the costs involved and can provide investors with Key Performance Indicators (KPIs) with which to sense check progress.

Large-scale investors can save time, money and mitigate reputational risk by employing a management company with an experienced in-house team to operate their assets.

“Clearly there is much toconsider, and all with an overarching focus upon maximising asset value and enhancing income.”

For instance, the operational strategy can be impacted depending on whether an investor is focused on absorption rates, occupancy levels, or has set out to create (and maintain) market leading income levels. As life is rarely as black and white as the example above, investors and their operating team must be aligned in their aspirations and objectives.

Omniscient Operating

The skills and knowledge needed to operate PRS assets are vast. It is akin to running a hotel group, a retail chain and a lifestyle brand, all at once. The key elements span; identifying the potential target market of residents, setting pricing strategy (which was

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“Given the complexity andresource-intensive nature of managing PRS assets... it’s commonplace to employ an experienced management brand to operate the assets.”

the customer experience right – the old adage that “you only get one chance to make a first impression” is grounded in truth – this can’t be at the expense of the commerciality of the operation.

It’s vital to be clear about what the service levels will be from the outset, communicate a proposition that clearly resonates with those service levels and above all, stick to them. Over-servicing can be just as costly as not meeting customers’ expectations and is incredibly difficult to pull back from once a precedent has been set.

The Power of Consistency

However, every good operator should have a host of weapons in their armoury which enable them to deliver defined levels of customer experience and maintain them at a measurable, constant level. The three core elements in delivering a defined customer experience are people, process and technology. For success, all three must be equally strong:

• PeopleA highly-qualified, knowledgeable and superbly trained team that understands and embodies the company’s aspirations as well as those of its clients is vital in delivering front-line services to applicants and residents.

• ProcessWithout clear, compliant and detailed processes and procedures, it’s impossible to deliver a consistent experience, let alone know what level of service is being provided, how it’s being received and how feedback is being acted upon to improve process and service delivery development.

• TechnologyIt goes without saying that technology should be an enabler to create opportunities, efficiencies and insight. For instance, how much time can be saved by investing in a keyless door entry system that allows property managers to give tracked and recorded contractor access from their desk? How much is saved on traditional key management hardware and software? And how much good will is generated by enabling a resident to remotely give access to their property to a friend without having to arrange handing over of keys?

Emperor’s New Clothes?

One option for institutional investors is to set up their own PRS consumer brands – both to mitigate any perceived reputational risk and to attempt to differentiate and add value to their proposition.

However, as alluring as it may seem to develop one’s own PRS consumer brand, given the complexity and resource-intensive nature of managing PRS assets, investors could get better value from the hotel sector model, where it’s commonplace to employ an experienced management brand to operate the assets.

Utilising a specialist third party business – one that operates for a number of PRS investors, has the firepower and broader market exposure to attract a wider pool of applicants and the operational scale to generate efficiencies that a lone investor simply couldn’t achieve – makes sense.

Such an operator would be in a position to offer investors performance-related fixed price operations, bringing cost certainty to an area that has the potential to quickly – and severely – widen the differential between gross and net returns if not handled correctly and expertly.

It’s time to talk to a PRS operational management expert.

Customer Experience

Gone are the days when an applicant benchmarks their experience against local lettings agents.Consumers are more informed than ever and an increasing number will, for example, have experienced living in institutional-grade, purpose built student accommodation.

In an ever-more connected and instantaneous world, PRS operators are judged against every single experience that a consumer has – irrespective of the type of organisation or brand that has delivered it. Clearly a challenge that isn’t for the fainthearted.

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SHAPING the PRIVATE RENTED SECTOR

R

The UK’s Best

Private Rented Sector Place Branding

The symbol and name are largely irrelevant to the product you buy. The Apple brand has a clear vision, and stands for a range of attributes and values which run through their people and find their way into the products that people covet and queue for. The Apple brand manages their thinking and creates a very persuasive story.

Of course, it’s easy to admire Apple with its multimillion dollar marketing spend. We can, however, identify a key principle they have adopted. For Apple, brand is an inside-out concept; it drives their product and the story, not simply articulates it. Quality, performance and innovation are at the centre of the Apple brand, not a by-product of it.

In 2011 we helped create best practice for local government marketing practitioners. Within it, we created a three point definition of the role of place brands.

• Define the place and what it stands for, its vision

• Unite all stakeholders in delivering this definition by creating shared values

• Project the definition and values to the right customers to attract them to us

Interestingly, within the research behind this definition, the most common reason for the failure of place brands was an inconsistent vision for the place which led to different interpretations of the story.

It’s easy to see that if, for example, developers, architects, agents and marketers don’t line up their thinking, the expectation they create won’t fit the reality of what they want to deliver. This will not create a strong, long term brand.

Tim LewisDirector of StrategySmall Back Room

smallbackroom.co.uk

Whether you like it or not, it seems the Private Rented Sector (PRS) has been slower than most in recognising the capability of a ‘brand’ in influencing customers’ decision making process. The sector needs to shift its thinking about how a strong brand proposition is increasingly important in the PRS.

The role of brands and branding in property marketing has always been an interesting debate. The agents have one opinion, the developer another and often the marketing department yet another. The answer is never clear cut. There is however, one common agreement – if you get it right, a good brand will add value.

Long term ‘brand’ thinking for the PRS is critical. More large-scale schemes are being conceived and built with rental in mind. By their nature these places must (arguably) stand the test of time more than a sales led development. Commercial success relies on taking a longer-term view, in the same way a retail asset pays attention to its brand, so must large PRS led ‘places’.

They must be clear on what they stand for so they can create repeat demand by delivering what they promise. This means creating consistency, not just in product or promotion, but in how it is managed and the terms and conditions they offer; the story they tell must become much deeper. This can’t be done with just a logo or without everyone in your organisation believing in the same thing and agreeing the desired outcome. Suddenly a vision (a definition of what you want to achieve) and brand values (the things you believe in which create behaviours) become critically important in creating a place brand.

So you can, and must, learn from brands like Apple. PRS brands must think beyond logos, brochures and websites and think about their brand as an inside-out concept. If not, they lack the framework of controls and support which a clear vision and values provide. This is long-term brand thinking and that’s where the value is.

Small Back Room (SBR) started working on the East Village brand over three years ago and at the centre of their brand lies a vision called; ‘a new way of London living’. This vision is underpinned by three promises; space, time and choice. A simple theory. If through location, design and management of the place they can bring these promises to life, they

“The golden rule in creatinga good brand is that it should draw its strength from what it symbolises and not the other way around.”

We should pause for a definition of terms. If your definition of a brand is a logotype, then all we are talking about is the symbol by which we identify a place or organisation. The only value this will add is a limited expression of the character of the place and (possibly) some reference to its location. Whilst this is useful, it is unlikely to be very persuasive, and persuasion should be the brand’s most important job. A brand is the sum of your vision, values and the promise you make to your customers – a brand organises and brings your story to life.

The golden rule in creating a good brand is that it should draw its strength from what it symbolises and not the other way around. Think about Apple.

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will provide easier living. Easier living creates more rewarding experiences, a positive atmosphere and a sense of well being; if they are consistent and become known for these things then they will be able to retain residents and easily attract new ones. Making these promises come to life creates their brand values.

We can’t tell you that this will create more rentals (yet), but next time your project team meet to review strategy, ask everyone to write down the vision and values behind the place you are creating. If it’s wildly inconsistent, you are facing a risk of not delivering a consistent customer promise and that alone is bad for business. If everyone is saying the same thing, give yourself a pat on the back, you’re on the way to creating a good brand.

a clear vision and understanding of target audiences and what drives their decisions.

Whilst we at SBR suspect the old adage of ‘build it and they will come’ has slowly died out, all too often we still see limited investment in quality audience research. This makes creating a good brand difficult and the knock on effect will be on marketing effectiveness. Regardless of how well you target communication, if the brand isn’t right, it won’t resonate. It’s like Snoop Dog playing at Glyndebourne – the fit simply isn’t right.

Effective data on rental audiences and their motivations is rare in the PRS but its value is undeniable. An audience segmentation and profiling exercise is, in comparison to the scale of overall investment, very small. All of us should ask one simple question – “how well do we really know our customers?”

A key additional part of an effective positioning is authenticity. If a place brand lacks this, customers won’t believe it and you will only occupy their mind space for a short period of time.

You want customers to feel a sense of ownership. To do this, they have to be given scope to make up their own mind. A by-product of an information rich, brand savvy society is (unfortunately), cynicism. People see through shiny new logos and made-up, zippy names; if they feel a lifestyle or place is being contrived for them, they will be less likely to buy-in.

The best places feel like they are part of the wider locality, like they could have been there forever, as they blend in and don’t try too hard to invent themselves as a ‘something’.

You wouldn’t give Notting Hill a strap line which said: ‘West London’s Bohemian Quarter’. Anyone cool or Bohemian would be quickly running to Shoreditch. So why do we so often see a meaningless strap line, which states the obvious, added to a new development. It is Notting Hill ‘the brand’ and experience which creates its positioning, not its name or a strap line. The more authentic the brand, the more likely it will stand the test of time, and this has to be better for the longer term nature of a PRS development.

So, we hope that you will now be thinking about your brands as inside-out concepts, creating clarity around your place vision and values, you’ll be advocates of customer insight, be keeping names simple and please, ban the jazzy strap lines!

There are of course many more things to consider, how to create physical and emotional attractors to brands, how to engage teams so they become the brand’s frontline, how brands are activated consistently across increasing numbers of marketing channels and the importance of making the visual identity, to name but a few.

“Private Rented Sectorbrands must think beyond logos, brochures and websites and think about their brand as an inside-out concept.”

We have waxed lyrical about establishing a brand which defines and unites (as we hope to have convinced you of the importance of the inside-out concept) so we will turn our attention to point three, projecting the brand.

There are two golden rules to effective brand positioning. Firstly, how you project the brand must reflect the true nature of the place. Secondly, it must be relevant to the target audiences. These two add up to brand positioning – we define this as: “the space we want to occupy in the customers mind”. Effective positioning is dependent on

“You want customers to feela sense of ownership. To do this, they have to be given scope to make up their own mind.”

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Engaging A New (And Unique) Community

Often, the emphasis placed on producing best practice guides for active stakeholders within the Private Rented Sector (PRS) concentrates on the management side of things; albeit finance, investment or physical assets. But as the sector grows and becomes more institutional and diverse, eyes should turn towards the way in which large-dwelling private landlords engage with their residents to ensure positive community development.

On the face of things, as long as residents are adhering to the Terms & Conditions stipulated within their contracts, an arm’s length approach should suffice – in theory.

In the Spring/Summer 2014 edition of PRSupdate our Chairman, Stuart Corbyn, provided an insight into the journey from Athletes Village to East Village. He outlined Get Living London’s vision to deliver a new way of renting based on London centric research, the creation of valuable brand partnerships and the injection of infrastructure aimed at creating a thriving new neighbourhood.

At the time of writing, Get Living London has welcomed over 600 residents to East Village. With retail units on the way, a high quality academy running at full capacity and a health centre capable of serving 20,000 patients, we have created a place where people want to live.

With Triathlon Homes overseeing the social housing element, along with intermediate rent and part-buy services, East Village is already housing close to 2,000 residents, all from different backgrounds and locations. This community recognises that they are living somewhere quite special.

As you walk around East Village, you can feel the Olympic spirit lingering and residents are already looking for ways to cement a legacy neighbourhood, befitting of its grand roots.

We at Get Living London actively seek to engage with this new community, by hosting events and resident meetings. However, we have found that when issues arise, as they do in all new communities, solutions are being formed from within the community. Also, residents are actively working together to find ways to develop various creative outlets for people within the village.

By pooling their expertise and spare time, residents are leading the evolution of this new neighbourhood in an organic way. From initiating litter picking groups to the creation of an informal Sunday football club, there are signs that the community is developing in a positive way.

The part we play as the landlord concentrates on harnessing the community spirit in a way which allows residents to dictate its evolution. We listen to and support residents in a very conversational way, have an events plan predicated on bringing all things good within the local area into East Village. We actively reach out to surrounding stakeholders to both share our activity and provide added benefit to our residents, be this through a discounted coffee or local theatre offer.

The most fundamental ideal behind all of our activity is that, while we keep the East Village community a priority, we also want to bring in people from the established, local communities to strengthen our own. We want to share with East Londoners a neighbourhood that is intended for the masses rather than the few and hope that one day the gap between old and new Stratford will disappear all together.

Jatin PatelCommunity and Stakeholder Relations ManagerGet Living London

getlivinglondon.com

Get Living London engages its community by hosting regular events and activities.

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Investment Analysis And Performance Reporting

Introduction

New Investment Market & Data:The UK is witnessing the emergence of a specifically designed and managed ‘institutional grade’ residential asset class, loosely referred to as the new Private Rented Sector (PRS), or as Build-to-Rent. However, for any investor, be this institutional, private equity, sovereign wealth funds or housing associations, there is a need to underpin entry into this sector with good quality data and analysis.

Therefore, this article looks to acknowledge some of the existing sources of data and provide commentary around these. Secondly, it highlights areas where improvement can be gained.

Investment Asset Performance:In the medium to long-term, the aspiration from an investment performance perspective is that this market resembles the US ‘multi-family housing’ market (MFH), where detailed accounts of the performance of the investments are standard in any investment particulars. Investors need certainty around the investment performance of this asset class. This will comprise both the annual net returns (i.e. income less annual maintenance and management costs) and total long term returns (driven by either yield compression and/or House Price Inflation).

For UK Pension Funds: The growth of the sector has, in part, been hindered (in particular in respect of the active involvement of the large UK pension funds) by the limited data that is available for investors to analyse. This creates uncertainty around how this asset class should perform. In simple terms, this can be broken down into

two broad components, with a strong focus on the first;

A. Investment Data:The gap in data broadly relates to the maintenance and management costs but also long term rental trends as well.

B. Demographic & Economic Data There is also an interest in gaining a better understanding of the wider demographic and economic trends across the country, which will help support geographic investment decisions.

Fortunately, as set out below, some data for both components does exist and the aspiration is that the collective industry continues to work together to further enhance this.

number of sites across London for development

• Swedish property company Akelius have been acquiring existing investments in London and the South East since 2011

Clearly they have become convinced of the merits of investing into the sector here in the UK, which is probably no doubt buoyed by their own positive experiences of investing in residential assets in their home markets.

Investment Data

Investment Market Performance – Aspiration: The ‘First Half 2013 CBRE Cap Rate Survey’, focuses on the US real estate investment markets, and provides a useful insight into the depth of investment analysis/performance that hopefully will evolve here in the UK. Page 17 of that report, focusing on the ‘multi-housing’ market, provides links to various charts, including investment returns/cap rates for the various US city markets.

In the US, with the market long established, there is a cap rate range based on the age and quality of stock, from ‘Class A’ through to a ‘Class C’. The UK already has an established, albeit small investment market. If this activity becomes more regularly tracked by the likes of Focus and EGi, the UK should see a similar style rating system become established once the newly built stock starts to be traded.

Maintenance & Management Costs: The limited quantum of data in respect of the deductions made for annual running and management costs, against the gross income received from tenants, remains a sticking point for some investors.

Dominic MartinMember – Private Rental Sector (Residential) Taskforce Department For Communities & Local Government

gov.uk

“Clearly they have becomeconvinced of the merits of investing into the sector here in the UK...”

Global Investors Already Moving: The slight caveat to this is that there has been significant activity in recent times, including both the funding of new build/development and acquisition of existing stock, which has been led primarily by international capital.

Examples include;

• The Dutch fund, APG, which announced a joint venture with Delancey and their land holdings at Elephant & Castle, and who also invested into Grainger’s GRES/GRIP fund in 2013

• M3 Capital Partners and their US investor have backed Essential Living, who have purchased a

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Rental Data – Oxford Economics: Oxford Economics has analysed various sources of data and has produced a ‘spliced’ set of charts (see Figures 2 & 3). This is based on data from various sources (DCLG, LSL Property Services, Hometrack and VOA) but the coverage of the data remains limited. It does, however, provide a useful benchmark.

Rental Premiums – Hometrack: An interesting consideration for investors is understanding what rents will be derived from this new investment stock, not only by way of a new build premium but also relating to provision of a better service.

For the former, a chart (see Figure 4) by Hometrack has analysed rents from selected new build schemes in mid-market inner London locations. The evidence suggests that there is a new build rental premium of between 10% to 15%, albeit acknowledging that the specific premium will be driven by a variety of factors including location and provision of amenities and services.

Demographic & Economic Data

The second component relates to the demographic statistics, growth of the PRS market and wider economic considerations.

Demographic

Census Data: Firstly, the Government publishes statistical census data, which includes growth of the PRS markets across all local authorities in England, which allows for a specific understanding of the growth of the PRS over ten years. Investors, as well as local authorities and consultants, can refer to these two data sets; the ‘2001 Census table T08 – Theme table on households’ & ‘2011

IPD, who have tracked residential returns for the last 13 years, do report average total operating expense deductions in their UK residential index along with a regional breakdown (see Figure 1). The two charts show void and operating costs for ‘all stock’ and ‘stock which excludes central London’, with the range of costs between 28.3% and 39.1% of gross rental income. However, with the index only totalling c.£2.8bn, some large scale investors have raised concern that this data is not of a sufficient scale or of a sufficient geographic variety (it’s heavily London orientated).

or externalised. Given these range of influences, some new entrants to the industry are hoping to achieve even greater efficiencies than 25%.

Rental Data & Rental Premiums: A shortfall in the market is the lack of of a sizeable and reliable set of rental statistics, tracking long term rental growth. In addition, there is also interest in better understanding the rental premiums that may be able to be generated, both from new build rental apartments and from wholly owned and professional managed apartments. The following data is available:

Rental Data – ONS: Since June 2013, The Government’s ‘Office for National Statistics’ has published the Index of Private Housing Rental Prices (IPHRP), which measures the change in price of renting residential property from private landlords (Great Britain, its constituent countries and the English regions).

Importantly, the index is not designed to measure the change in price of new rental agreements (or advertised rental prices), but an index to reflect price inflation in the stock of privately rented property. It is currently released as an experimental statistic and is undergoing evaluation. Key findings in the January to March 2014 index included:

• Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to March 2014, unchanged from a 1.0% increase in the 12 months to February 2014

• Rental prices increased in all the English regions over the year to March 2014, with rental prices increasing the most in London (1.4%)

“A gap in the market isthe lack of a sizeable and reliable set of rental statistics, tracking long term rental growth.”

Yet those investors already committed are clearly comfortable with the expectations of these costs, either via direct experience or an awareness of these costs in other established markets. The perceived wisdom is that anything between a 25% to 30% allowance is reasonable. Established gross to net deductions include a combination of void and bad debt, management and lettings costs and annual running costs (insurance, utilities, general refresh, etc). However, there seems to be less certainty around allowances for a sinking fund.

In reality, gross to net deductions will be influenced by the scale of the buildings and/or the quantum of units within any wider operation. Furthermore, the scale of the property and/or the operation will influence whether management (estate and/or property) and lettings functions are internalised

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interest. The table ranks ‘private sector employment’ growth by percentage change (see Figure 8). For any investor, focus on those locations which are underpinned by generally more robust local economic performance, and those with the greatest growth projections, will be implicit in any strategy.

Conclusion

The future certainly seems bright with the continued growth of development funding and investment activity with investment decisions being made on the above, and other data sets. Yet, as highlighted in the introduction, the focus has to be on more robust data relating to rents and investment performance and the PRS Taskforce is working hard with the industry on this.

This includes working with the above referenced sources, the large commercial and residential management agencies and the Government. We are also delighted to announce that the Society of Property Researchers has also agreed to assist with this matter.

Furthermore, it is clear that new entrants are looking to underpin their investment with strong management and reporting standards. Therefore, the aspirations of a more transparent investment market, like that enjoyed in commercial property sector, will be a reality.

We hope that our work, and this article, provides further impetuous to the sector to continue to work together to help develop the PRS.

Census table KS402EW – Tenure’ (see Figure 5). Taking the eight Core Cities Group as an example, the growth of the PRS has been significant across all cities, with each seeing more than 50% growth. For Manchester and Birmingham, there was over a 100% growth in the PRS.

English Housing Survey: Secondly, the Department for Communities and Local Government publishes its annual ‘English Housing Survey’. The latest ‘headline report’ was published February 2014 and stated that for the first time, the PRS has overtaken the social rented sector;

“There were an estimated 22.0 million households in England. Overall, 65% (14.3 million) were owner occupiers, 18% (4.0 million) were private renters and 17% (3.7 million) were social renters.”

The significance of this change in dominance of the private rented market allowed for a specific focus on the PRS, within the ‘Household Report’ survey, published in July 2014, which includes a chapter specifically on the PRS and provides a useful insight to the growth of the sector.

Economic Data

The final component to the investment story is the economic outlook of a particular region, town or city. For any investor, confidence in the income stream is clearly imperative. For commercial property and analysis of the income, the tenant’s covenant, the availability of company accounts and credit assessment reports underpins this. With this not feasible for residential investments, reference to the strength of the local economy and in particular the job market may give some comfort.

Gross Value Added: In addition to working with particular local authorities to draw out this data, the ‘Gross Value Added’ data (a similar metric to GDP at a localised level) can provide some guidance. This annual data set of 99 ‘unitary districts’ across England sets out the economic growth of those districts year on year.

By way of example two tables (see Figures 6 & 7) review the GVA data from 1997 through to 2011 and 2008 through to 2011 only (i.e. downturn only), showing the ten best performing districts. Interestingly, seven of the ten top performing districts are non-London South East locations.

Whilst this is clearly a more macro analysis of the economic performance of these districts and should not alone drive an investment strategy, it does nevertheless provide a meaningful insight in to the economic performance of the wider districts beyond the traditional investment focuses of London and the South East.

Centre for Cities: A more specific set of analysis for investors to consider is the work undertaken by Centre for Cities, which reviews various economic data for 64 cities in the UK. Using their ‘Cities Outlook’ data app, it is possible to rank cities by a number of different indices, including skills, employment rate, weekly earnings. From a PRS demographic investment perspective, statistics relating to ‘private sector employment’ will be of particular

“For any investor, confidence in the income stream is clearly imperative.”

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Percentage of gross rental income lost to voids and operating costs – IPD Residential Index 2013

Average private rents, North of England – VOA/Oxford Economics/National Housing Federation December 2013

Average private rents, South of England – VOA/Oxford Economics/National Housing Federation December 2013

Rental Premium Potential: Selected new build schemes in mid-market inner London – Hometrack 2014

2001 & 2011 Census tables – ‘Theme table on households’ – DCLG / ONS

10 best performing districts 1997 to 2011 – Gross Value Added Data / ONS

10 best performing districts 2008 to 2011 – Gross Value Added Data / ONS

Private sector employment growth 2011 to 2012 – Centre for Cities

Figure 2: Figure 1:

Figure 3: Figure 4:

Figure 5: Figure 6:

Figure 7: Figure 8:

Appendix: Supporting Information

Young Group has been shaping the Private Rented Sector for more than 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. Recently, the International Property Awards crowned Young London the Best UK Lettings Agency 2013/14.

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.

Neil Young ACMA CGMA MARLA

Chief Executive Officernyoung@younggroup.co.uk

David Mackenzie FCMA CGMA MARLA

Director of Asset Managementdmackenzie@younggroup.co.uk

Canary Wharf Hub30 Marsh WallLondonE14 9TP

+44 (0)20 7531 7700

London Bridge Hub128 Webber Street

LondonSE1 0QL

+44 (0)20 7593 3300

SHAPING the PRIVATE RENTED SECTOR

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