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  • Writer's pictureAnna Clare Harper

The evolution of residential for rent

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Anna chatted with Cath Webster, CEO of Thriving Investments, the fund manager with a social conscience backed by Places for People, the UK's leading Social Enterprise which owns or manages over 240,000 homes for 500,000 Customers across the UK.

They covered:

  • The different segments in residential such as Affordable Rented, Social Rented and Private Rented

  • How Build to Rent has evolved, from ‘Gen1’ to today, including the rise and fall of amenities

  • Investment yield valuations, why liquidity is so low in Build to Rent and what this means for BtR players.

Listen in here:

This transcript is AI generated. Please excuse any typos.

Anna Clare Harper: Hi, and welcome to The Return: Property & Investment Podcast. I'm Anna and I'm delighted to be joined by Cath Webster, who is CEO of Thriving Investments, which is a leading fund manager with a social conscience backed by Places for People, which is the UK's leading social enterprise, which owns or manages 240,000 homes for 500,000 customers across the UK. So welcome to the podcast Cath. And thank you for joining me.

Cath Webster: Thanks for having me on.

ACH: So we're going to cover a couple of different themes today. I wanted to start with the different segments in residential and how they're maturing, and also what drives investment valuations. So I guess just to kick it off, I think can be quite difficult for people who aren't steeped in real estate, and even sometimes people who are deep in real estate but are in a very specific part of the market to actually navigate that market. So I wondered if you could start by debunking the different tenures, and explaining the unique characteristics and challenges associated with each of them in the current environment.

CW: I shall give it a go. So there's different ways that you can slice and dice the residential market. But perhaps the easiest way is just to look at what is owner occupied, which is sort of 65% of the market in the UK. And then the rest is rental, which is private rental or it's affordable rental, but there's also affordable homeownership as well. So you're already getting you know, you're never gonna get some nice categories. But generally, you can sort of mix them between that. And I suppose the first thing to say is, it's quite difficult first off to say affordable versus market value in that in terms of maybe the rental side, or even the homeownership side, because there's no all encompassing definition of affordable anywhere. Think the ones that most people use were from the National Planning Policy Framework, which the definition says affordable housing is social rented, affordable, rented and intermediate housing provided to eligible households whose needs are not met by the market. So eligibility is determined with regard to local incomes and local house prices. But you could argue that affordability is actually can people afford it and lots of low and middle income households can't even afford some of those affordable tenures. So it makes it even more difficult, isn't it. But clearly, on the opposite side of that market value is where there's no eligibility criteria. So that's sort of one way of being able to differentiate, but then if we dig down a bit further into affordable housing, you can get regulated affordable, which means that you're owned and managed by an entity that is a regulated provider. So a housing association, in different parlance, and they're regulated by the regulator of social housing, they can do affordable rent or social rent, but you can also have other affordable tenures in there. But some of these 10 years actually aren't regulated, but could still be classified as affordable. So actually, anybody can manage them. The main one that people think about is discount market rent, which basically means it's anything up to 80% of the local market rent. But there are different names for those as well. So the confusion just continues in all areas that that's actually sometimes called affordable private rent, to differentiate it from affordable rent, which is also quite a similar tenure. So as I say, sorry, but it's not going to get any clearer. You know, I would say another way of looking at the affordable is that the characteristics and some of the things and challenges about it is obviously you need a subsidy in order to create it, it needs to exist, because there are problems with affordability, and there's a housing crisis that everyone's aware of.

But to be able to create these houses, which, especially for the social ones are below replacement cost, or build cost, you really need some sort of grant subsidy. And you know, being part of planning or a mixture of the above. But the interesting part about them, if you think about some of these affordable housing tenures, is that you're guessing inflation matching characteristics with them, much like you do on the private rented side. So whilst you might look at it and think it's very different tenure to the market value rental, it can grow at a similar rate or at the inflation rates, it's just its starting point, and its affordability levels are much lower. So I think those are the main ways of slicing and dicing things within that. And then you can say, okay, within rental, what types of properties that we're looking at. And Savills recently did a report, which actually we sponsored, which sets out some very nice demographics, which I'm looking at right now, but they split it into the buy to let private rented sector, generic side of things and the build to rent side and you know, and how does that differentiate itself? It's sort of really around it being purpose built. Was it purpose built or is it a house that could be used generically and the built around obviously, is one that people have set out to build to own everything, if it's an apartment block and to manage it professionally, whereas buy to let is more of a generic, but the buy to let market is huge. There's 5 million households also in the private rented sector altogether, and 4.9 million of them are in buy to let you know 100,000 or less as in build to rent. And then you get out bill to rent again, and you split it into multifamily. And then you split it into single family, single family literally just being a house, but it's also called Single Family Housing, suburban build to rent or I think the UK is now calling it build to rent housing. So again, more terms for exactly the same thing. So confusion still reigns.

ACH: Okay, very helpful. And it's interesting when you're talking about the difference between build to rent and existing kind of buy to let. And that's a question that we get asked by our investors a lot about, you know, not that the activities are in any way similar, but just that build to rent is something that has been talked about for some years, and that people understand. And, yeah, it's interesting. I mean, of course, there is that intention at the beginning. But it's to us as well the big difference is the professionalism of management, and how you manage things when you're looking at things from a professional investor from an institution's perspective versus how you do the traditional buy to let landscape dominated by individual buy to let landlords is very different and very much less professional so that I'd see being another key driver. That was a really helpful summary. And I guess what will be interesting, in addition to that is just to understand the different types of customers within those tenures, and how they've matured over time.

CW: It's a funny one, actually. So prior to being a thriving investments I was at quintain, and we were doing a number of built rent developments around Wembley they still are. And actually, I think the mess when we started building in 2016, or so that we started actually renting in 2016, sorry, the myth was that actually, a lot of these build to rent properties, were really there for people sort of 25 to 30, possibly 35. But actually, we had people throughout the lifecycle who were renting for various reasons, okay, there's a huge amount of people, actually lots of students with it. So we have a lot of 18 year olds, there was a bulge, probably in the 25 to 45 range. And that most likely is because of opportunity to be able to buy their own home. But having said that, we absolutely had people from all ages, there were I think the oldest people or eldest person at one point was sort of over 90. But you know, we had a lot of people in their 50s, who'd sort of downsized, and were very happy to live urban, and sort of probably sold up and used bank of mum and dad to help. But really, the customer age profile was far wider than perhaps I think a lot of people thought it was going to be. And in fact, actually, when we looked across that to the single family housing, it's actually quite similar. The profile tends to be, I say tends, but there's no, you know, you can draw some sorts of conclusions. But it tends to be a loss of key workers, people want to find, you know, the rental close to where they're working. And those key workers really being an a very wide definition, not the sort of COVID definition, but wide definition of the people that are in around the median income. So very much mid market type properties. This is not luxury build. And then those customers really do is you've just talked about, it's sort of the professional management, they really do appreciate the fact that they've got a landlord who is there as a professional management company can attend to any problems that they might have with the home on a very quick and speedy basis. But also they are a long term owner and not looking to sort of turf them out as they sell up because the markets gone up or whatever. So they get that stability and that certainty. But I would say actually, between looking at the sort of single family housing and the multifamily housing, there's not massive difference from at least the examples that I've seen firsthand.

ACH: Okay, super interesting. And I guess part of that as well is being driven by the other fundamental shift in the market, which is just that ongoing, chronic shortage of available homes that are decent quality, and I'm not talking premium necessarily, but I'm talking Decent Homes standard.

CW: And, again, I mean, you know, there are stats out there all over on there. This recent report saying 250 billion of investment needed to meet future demand. I mean, that's a huge amount of money projected increase of up to a million peers households between now and 2031.

ACH: Today we have 11:1 in terms of renter to potentially rented property, right?

CW: Yeah, exactly. And actually, even if you think that the markets been expanding because we keep talking about sort of build to rent coming in and so the UK private rented sector as it is, has actually remained static for about the last 8 to 10 years because of a loss of people exiting from being a buy to let investor and then sort of we're running to standstill I guess aren't we.

ACH: Yeah, really depressing. So I guess touching you mentioned earlier, your experience at quintain. And now as CEO of thriving investments, I wonder if you can talk about how the bill to rent and single family housing market or whatever challenge you'd like to use has evolved over the years from the early days to today?

CW: Yeah, of course. So Quintain was a fascinating place to be because we were creating lots of built to rent apartments in one location. And so almost from a scientific point of view, you had your control, that was the one location so you were taking out the sort of any variation that there could be on that side of things. And as I say the first units came out in 2016. Actually, those recently transacted in terms of the buildings being sold by quintain. But they were lower rise. And they were actually build to sell that got redesigned some partway through the process of the build process into bill to rent. And there were some amenities put on the ground floor, which were going to be apartments and got redesigned into sort of kitchen workspaces play areas, you know, hire out areas, etc. But we're probably more akin to some of the suburban multifamily is that you get, which are much lower amenities, the next properties that came through, and very much driven more by the sort of American market, which seemed to be at the time, we didn't go as far as the American market, but it seemed to be a complete race as to how many amenities you could get into your building. You know, there were study tours done at the time by the company, and, and you know, they were funding basketball courts and swimming pools, and all of this other stuff was all being put in there. And it was sort of like, wow, this is a huge amount of expense. What we tended to do contain was to put different things into different buildings so that we could try and see whether or not, we could look to see what was being used. But we also made it very flexible so that it could be converted into something else if everyone decided now actually, what I want is x, that works really well. Because during the COVID years, everything moved into working from home space, so that people get out of their apartment and go and sit somewhere or hire a meeting room space or whatever it might be. And I suppose the flexibility point was proven. But going back to your question, sort of how did it evolve, I think it was really a lot of it was around amenity space, but also a lot of it was around, we could see what sorts of apartments people would appreciate in terms of layouts. And we got much better at being able to deliver that and deliver a complete sort of spectrum of the types of styles that people wanted. I would say there's probably been a pullback in the amount of amenity that people are doing now, you know, it wasn't a sort of curve that carried on going up it has definitely plateaud. And it might even come back a bit in some of the later generations that people are like actually, rental prices are rising so quickly that people don't want to feel that they're buying some of these other immunities. And they're actually, they're quite happy going to places that have got less amenities, but maybe other for less costly. There will always be people who want to pay for all of the high class gyms and all of that sort of thing on site. But I think it's been an interesting evolution as to the types of amenities provided, but actually what people value and what it turns out people value are probably the gyms that work from home space, we grew the number of through actually in scale, so that we could have 24 hour concierge. And that's very much appreciated from a security point of view, especially for sort of single people coming home or whatever during the evening. But also things like you know, post rooms and having the ability to have concierge take parcels and all of that thing in our ever shopping e-shopping world that we're in now. So, you know that really sort of we did see that evolution. And I think interestingly in the single family housing market. So obviously just on the home side, that delivery model is still coming through mainly from the house builders. I mean, they've got that hugely tied up and they can build these things to a much better cost basis than anyone else. Whereas obviously in the build to rent market, quite a lot of developers moved into that not necessarily the house builders. So actually, I'd say there's much smaller differences between the single family rental as there is to the owner occupier. When we come in and buy from house builders, we do change specification, but the things about that sort of central core and all of that that you'll get in the multifamily building, obviously it's just not applicable at all. But we do have I mean, we have our criteria as to what we want for single family and what we know will rent very well but actually there hasn't been that much of an evolution in terms of specification but what has happened massively is that that market is becoming more and more prevalent in terms of single family housing. Again, if you look at that sort of built around, if you say it's about 90 to 100,000 homes that we've got about 10% of that has been delivered as single family, but actually in the pipeline is a huge amount. We've been investing in that for about five years, we're coming up to about 2000 homes in our picture living funds that we manage, or joint venture that we manage. And we continue to buy in that market. But there are a huge number of new entrants that are coming into that. And that's very much growing. So I'd say more the evolution on that is the number of people who are appreciating that actually build to rent. And the multifamily side of things is very interesting. But also the single family housing is very popular. And I think it's something like 80% of us live in a house versus a flat in this country. So actually, you can see that that would be the case that you would balance those two out, right?

ACH: Yeah. And it's a different requirement for a different age and stage in life in many instances. Okay. So one of the things you touched on there was around, you know, you mentioned some of the projects you've been working on for the last five years. Can you give a kind of Idiot's Guide to what the different generations of build to rent and single family housing are because you hear the term, gen one, for example, referring to the first generation of build to rent homes. Where does that begin? And how do you kind of differentiate almost like the age groups of different types of housing because these projects, they didn't happen overnight, they take five years to build.

CW: Yeah, it's funny, isn't it? So actually, for Gen 1 is like, you know, not that long ago. It's like I say, I'd say Gen 1 was sort of eight to 10 years ago, it's been very quickly moving through its cycles, where does it start? Where does it end, I would say the early stages of things, if you think about the earliest things in London were things like East Village that you get living or doing right. And they had taken some of the Olympic Village basically, and converted them. And actually, that's probably where you'll see the biggest change or evidence between that what they're doing now. And what they own as Gen 1. And it's things about being more efficient about the design just about how people want to live and how people share houses as well. So you know, in terms of size of rooms, being ensuite, the amenities, as we've spoken about at length, and all of that side of things. And really sort of understanding exactly what people want, because in the business that we're working in, the yields are so low, and the margins, therefore, in terms of, you know, you have to work very hard to make sure that your cost of you know, as low as they can be to provide the right service so that you don't have to excessively go mad on rents to make sure that you can be affordable to people, you have to really work hard in terms of how that square footage is laid out. That's the point I think I'm trying to make. And I think the difference really, if you look at it, other than the very plain amenity side of things, is that people have really thought about how the square footage and the layout works so well. So that you know your build costs to rental value are as good ratio as possible. When that actually happens and changed is an interesting point. I don't know we into Gen 3 now not sure, but definitely gen one, I would say yeah, started probably in that first wave eight to 10 years ago, and gen two would have been starting probably 2017, '18, '19, something like that, then those sorts of deliveries will probably enter Gen 3 now as you say it's probably thinking more about the post COVID world and how people are working more from home.

ACH: Okay, and one of the things you touched on there was just the yields being so low. This is a topic that is super, super interesting for me. But there seems that any new strategy and build to rent was new, like you said at that point, sort of whenever it was eight to 10 years ago, or maybe a little before build to rent was new. And for new strategies, you need to deliver a higher return to get people to put their capital in but as time goes on, they'll accept a lower return in general. One of the kind of challenges for oh, and sorry, the reason I think about that a lot is because when we're thinking about institutionalising and professionalising, effectively professionalising existing buy to let properties which is what my business does. I would believe we're looking at higher returns and we will be in five years time for that same strategy because once it's proven people will accept a lower return. One of the major challenges for investors in institutional residential is kind of the lack of comparable evidence for investment valuations. And you mentioned earlier you know, some transactions that have happened at quintain and there are comparables but there aren't loads. Are you able to share some examples of portfolios of rental sector homes and what the pricing actually is like?

CW: It's a funny one. It's exactly the key reason why I think a lot of people look at this market cautiously but understand that the market is really underpinned, as we said before, by a huge amount of demand and a housing crisis that won't be solved in my working lifetime. So the whole fundamentals of the market feel right, butbeing able, as an investor to say, I'm going in, I'm going to get this source of return. And I know that I can exit at this because there's lots of evidence, there's not that there are small pockets of single family housing portfolios that have traded, and then the odd building that has traded as well. And then there's been some sort of, you know, corporate mergers that have happened as well, but nothing really that I think anyone could very much hang their hat on. And it harps back to the purpose built student accommodation market sort of 20 years ago. And I was, you know, years ago working with Unite, and they were selling buildings at the time, not because they wanted to sell them, but because they had to create the evidence to make sure that their valuation yield was, you know, at a level that they thought was right. And now that market is very mature, obviously, 20 years on and moving at pace, but akin exactly as I said about the pbsa market, you have to create this product. And most people who want the products have created it for themselves. And so therefore, the last thing they want to do is trade it, because they've gone through the heartache and headache of creating it in the first place. So trading isn't happening very much. What you do see is the ingoing yields changing, and I suppose that's at least some sort of indicator as to where people feel that risk is and that return should be. And those have definitely widened a little but being at such a low rate, actually, has sort of very small movement is still percentage wise, sort of quite a big movement in that.

ACH: What kind of numbers are we talking about?

CW: I would generally say that sort of, you know, London yields were low threes at some point. And there were even some forward funding deals that were done in the threes, that's now probably starting with a four. And it just depends on a whole load of other factors, doesn't it like the scarcity, how your ESG is standing, what the age of the building is, and EPCs and all the rest of it, but definitely the major thing that has moved that yield is your benchmark to other asset classes and to the underlying interest rates.

ACH: What about an equivalent figure where you just described in London, what about regionally?

CW: So there was always a difference between London and the regions just simply because London was getting much stronger rental growth? I do wonder where I mean, I hear some of the London rents now. And you wonder how much more growth they can get from that, because they are very high. But yeah, the regions were always much closer to four in the previous market, and are now actually probably still haven't moved massively from that level, is still somewhere around that level. Interestingly, in terms of the valuations that we've seen, even with some sort of yield movement, the rental growth that's been coming through in this market, it's been underpinning the valuation. So even if there has been some yield movement in valuations over the last sort of 18 months or so, and obviously, quite a lot of investors have seen a massive change in commercial market valuations, it didn't happen in the residential market, it's a very, very different market, it behaves in a different way to commercial, you'll never I don't think hit the lights out in terms of rental from residential. But on the flip side, it will always be that steady Eddy in terms of returns. Yeah. And the correlation between itself and between other real estate sectors is very low. And so actually, I think that's really it's sort of its major USP is that it's just a strong and steady performer. But you know, you're not going to get massive out performance, or underperformance.

ACH: And what are the key factors that drive investment yields, valuations in the residential sector that you've seen, you've talked about different generations, different amenities, and supply and demand, and then interest rates, there's lots of different factors, I wonder if you can talk a bit about kind of the risk factors and the extent of their impact?

CW: Yeah, so I mean, most of what trades is new build from house builders, or most of what's been bought, so the types of things and the criteria that we look at to make sure that we have got a good investment, which to me equates with something that will have a strong and consistent valuation, that sort of obviously, as we say, is going to be underpinned and grow, is you know, all those general things that most people would look for when they're looking for a house, you know, have you got somewhere that's a nice place to live? So you're close to somewhere that's got immunity and green and nature and all the rest of it, which also fits in with all our sustainability and responsible investment policies. But you know, it's actually just a nice place to live. But it also has public transport, local employment. And I suppose the buildings are what we look for are future proofed in terms of how we can ensure that even if they're not on the sort of netzero path right now, just simply because of how they've been built that they have the capacity to be. So the ones we've got, we've got a whole loop being delivered at the moment up near Bicester, which are all ready to have air source heat pumps in, they don't have them, but all of the pipes are there and all of everything else is set up. Doesn't sound very technical, but to do to do that, and so I suppose, take the flip side of that, and most of the stock in the UK of houses is probably pre, I don't know, 1940s, or whatever it might be right and the majority of the stock and so there's going to be a huge amount of investment that's going to be done not only in things like insulation, and getting EPCs up from windows and doors and installation point of view, but also from an energy point of view. Yeah. And so I'd say those are the things that we are generally thinking about. But the nice thing about this market is that you can go and look at it and think, are there jobs around here would people want to live here? And you know, is it close to some sort of transport so that they can get to their place of work? Because as I say, most of our customers are in some sort of key worker role.

ACH: Super, super interesting. And so is there anything else that you want to talk about on investment yields, valuations in residential? Is there anything else that kind of stands out as being interesting, either in terms of trend or in terms of differentiation between different parts of the market that you find interesting?

CW: No, I think I listened to what Simon Scott said whenever he was recorded on here a couple of weeks ago, I think there is this discussion in London about the high rise buildings and dual staircases being needed, etc. And whether or not some of the institutions will be buying into high rise buildings or not. There are people that buy it, there are obviously people that trade in those sorts of areas and buying it and there is liquidity. I think there is a definite sense in the market that institutions have been very purist about what works now. And going forward, even if it worked at the time that it was built, if that makes sense. Yeah, it's getting all of its building regulations. And it'll be interesting to see how that plays out. We personally don't have anything really major in London and nothing high rise at all. So actually, it's nothing that we've had to battle with or to see. And so we don't really have any empirical evidence of that. But it's definitely an interesting thing to watch with how investors move forward.

ACH: I should be watching too. Super super interesting! And if listeners want to find out more about you, or thriving investments, or what you do, or just to get in touch, what's the best way for them to do that?

CW: Oh, find us on LinkedIn probably. But we also have our own website. So And you can see some of the things we've got on there. We put some insights on as well. We just started so single family housing insight went on this month and there'll be another one shortly.

ACH: Oh, amazing. Someone to check out. Thank you so much for highlighting that. And thank you so much for joining me.

CW: Thanks, Anna. It's been great. Bye bye.

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