29 August, 2019

The Evolution of Valuing BtR


In the UK, Build to Rent (BtR) is expanding and becoming an established product. Following in the footsteps of our American counterparts, we are witnessing a seismic shift in the rental sector. This is both in terms of the product provided and consumer recognition of that product. Where BtR developments have been completed, renters are buying into the concept of a branded product with hotel style services and level of amenities.

As BtR continues to expand in the UK, there are several considerations we need to address from a valuation perspective; Will assets become increasingly segmented/categorised? Will branding need to be incorporated into a valuation over and above just “bricks and mortar”? And how does the valuer continue to adapt to this evolving sector?

Evolving Classification

Whilst valuers by nature reflect rather than predict the market, we do seek guidance from the established US Multifamily product. The US Multifamily market is both transparent and predictable in terms of rent transparency and classification of product. There are three main categories; A, B and C. Class A Multifamily generally comprises newer, high rise properties located in a Central Business District with high end exterior and interior amenities. Class B Multifamily comprises properties generally constructed within the last 20 years of a good quality construction but with a more dated exterior and interior amenity package. Class C Multifamily generally comprises assets built within the last 30 years with a limited amenity offering, requiring a degree of interior maintenance with the majority of appliances being “original”.
Source: Crefcoa

In the UK, we have progressed BtR product beyond a simple tick box exercise of amenities to something more discerning. We are seeing a similar classification system emerging, although there is a long way to go before we will reach the scale of product and categorisation seen in the US. At the moment, I would say UK assets can be broadly categorised as:

  • Class A: BtR product offering high specification finish with significant luxury amenity in well located, city centre locations, close to transport hubs
  • Class B: BtR rent product- purpose built product with some amenity offering in city centre locations, close to transport hubs
  • More traditional PRS stock, older stock with little to no amenity across primary and secondary locations.

Take Deansgate Manchester as an example of what would be considered a Class A product. L&G have recently launched this scheme which incorporates high end residents’ facilities including; a 25m swimming pool, indoor tennis court, 1,900 sq ft gym, leisure suite, resident’s lounges and relaxation areas. There will also be a resident only rooftop garden with private bar and catering facilities. This will be set in 2.7 acres of public realm which includes a riverside plaza. It will be the highest profile residential-led development the city has seen to date. If that won’t pull the punters, I’m not sure what will. Since it launched, the scheme has let c. 150 units with over 300 prospective tenants. It certainly paints a positive picture that the UK tenant base certainly has the appetite for what would be classified as a Class A product.

The Evolution of Valuing BTR 1

The UK market currently has scope to support this offering. However, as valuers we need to consider the long-term sustainability of such ‘Class A’ schemes in the context of an increasing development pipeline and social and economic factors which should not be ignored.

Brand Loyalty

The Evolution of Valuing BTR 2

“Do what you do so well that they will want to see it again and bring their friends” – Walt Disney

We are seeing increasing brand loyalty from renters. Fizzy Living, for example, was one of the original pioneers into this sector. Now, with eight stabilised assets, Fizzy report that its tenant base buys firmly into the Fizzy brand, which includes its on-site “Bob” managers and wider social and community concept. Reportedly, tenants are remaining loyal to the brand, beyond just bricks and mortar:

 “This is the second Fizzy building we’ve lived in. I can safely say we wouldn’t want to live anywhere else, thanks to the incredible quality of service and living standard afforded to us. Our property manager, Tia, is fantastic. She is always so helpful and friendly and we could not ask for me. The quality of the flat and its location is excellent. We moved here from the Canning Town site which was equally wonderful but we preferred Poplar for its access to greener spaces. We’re settled and very happy.”

Flynn B Private Tenant Review Date Mar 2019
Source: HomeViews, known as the Tripadvisor for residential developments.

Indeed, we are seeing new and ever quirkier company brands- such as Tipi for example, whose powerful advertising campaign encourages renters to “Join the Rental Rebellion”. Renters are responding positively to this and buying into the lifestyle and social/community offerings available to them. But whilst this drives revenue and take up for a scheme, the longevity of any “premium” to locally embedded values will need to be proven over time.

Get Living launched in May 2013, as one of the very first build-to-rent operating platforms following the Delancey/Qatari Diar acquisition of the London 2012 Athletes’ Village. Rick De Blaby, chairman of Get Living, comments: “We pioneered an attitude shift from tenants to customers, offering greater transparency between investor/operator and resident, to build trust, loyalty and advocacy. By a focus on delivering a great home, in a great realm, with exemplary service support, we offer a hassle-free and more rewarding renting experience. In neighbourhoods such as East Village, we have everything from gyms and beer taprooms to cafes and laser tag, all of whom we work in collaboration with to curate events for our residents, which can take the form of supper clubs and what we call ‘Big Nights In.’ We also run regular events in the public realm for the wider community, for example food festivals and screening major sporting competitions. As we create brilliant big city neighbourhoods across the UK, we will always continue to innovate and find ways to deliver a more rewarding renting experience and lifestyle.”

The challenge with branding remains to differentiate yourself but getting this right can add significant value to a scheme. It is quite easy to achieve branding/loyalty in a market with limited competition as consumers have less choice. However, this will be increasingly tested as the market becomes more competitive.

The Evolution of Valuing BTR 3

Credit: Frank Da Silva

Valuers: the need to evolve

As valuers, we reflect the market. By doing so we have had to evolve our valuation approach and methodology to better reflect the assumptions made by those actively participating within it. It appears to me, that as the BtR market matures, we must be mindful of all aspects - geography, size of scheme, amenity, deal structure, supply, demand and economic/demographic considerations.

On the branding point, achieved rents may indeed reflect an element of “brand pricing” which should be considered by the valuer. When we reach a point where a greater number of BtR assets are being traded on the second hand market, it will be interesting to see the treatment of any additional “brand value”. The underlying value of an asset must remain the bricks and mortar; where it is, what it is, how large the units are. However, as time goes by, will this “goodwill” element (to the building, service, branding) become transferrable? And as valuers, the question remains of how we will reflect this within our valuations.