In January insurance firm Legal & General announced it was teaming up with a Dutch pension fund manager to invest £600 million in the UK build to rent market. Colin Marrs talks to L&G’s Dan Batterton about why the sector is likely to ride out Brexit fears
Dan batterton legal and general
You call your product ’build to rent’. Do you make a distinction between that and the other buzzword, PRS (private rented sector)?
We make the distinction because we want to get across what we are creating is purpose built for rental. PRS is largely filled with private landlords with one or two or three apartments. Our scale is different. The intention is that we are involved from the design, through the build and will own the building in perpetuity. We have a few golden rules and one of them is that we have control of an unbroken block.
Why has Legal & General decided to enter the build to rent market?
About a century ago, institutional investors were building rental schemes all over the country. However, rent controls led to them selling out of their investments. The current catalyst for moving back in is the low interest rate. We decided that we liked the returns from the residential sector in terms of rental income – capital growth is not important because we are not looking to sell. There is a certainty of occupation and a stability of income – you will always be able to find a tenant, although rental values may change. We are aiming to provide a return of between 4 and 5 per cent to our investors. We looked at what buildings we could buy and decided there weren’t any, so we would have to build them ourselves.
How far are you into the journey?
We have three projects under way. A scheme of 225 apartments designed by AHR Architects is coming out of the ground in Salford, directly opposite Spinningfields. That will be our first operational scheme, with the first residents moving in by May 2017. We then have two other schemes at different stages of planning – both by Assael. We have detailed planning for 168 apartments next to Temple Meads station in Bristol and are working to increase that to 220 units. The final one is in Walthamstow, for 440 apartments.
Do build to rent schemes demand a different design approach to homes for sale?
There are quite a few differences. Inside the apartments we are designing for individuals sharing, rather than families, so we provide one bathroom for every bedroom – all ensuite. We need to provide some privacy – the living room is in the middle and bedrooms are on the side. Also, people want more storage space. In addition, as we are planning to keep ownership for the long term and people will be moving in and out, we build slightly wider doors.
We have tasked our architects to maintain flexibility in the designs – particularly the communal space. We may find that residents don’t value a gym and that we need to change the use of particular spaces. We are looking at ideas for the future – maybe in five years’ time we will have to have a virtual reality room.
We compete with the for-sale market by providing resources you wouldn’t have if you owned your flat
When you move outside of the apartment, we normally insist on having two lifts. If there was just one and it broke down, we would get a lot of complaints and it would have a reputational effect that could affect rental income in the long term. A developer selling the flats would try to maximise the accommodation space.
We also try to compete with the for-sale market by providing extra resources that you wouldn’t have if you owned your flat. For example, we provide private dining spaces – you can hire a dining room for a dinner party for a larger number of people than you would be able to host in a small flat. We also provide gyms and cinemas.
Another area that is important is sustainability. Using thermal massing and energy efficient measures can help us reduce the long term costs. In Salford, for example, our scheme has solar panels, which helps us improve our investment return. Not because it is a requirement – but because it makes economic sense. We consider the long term view, rather than how cheaply we can build.
How about the quality of the materials?
We use more durable materials because we don’t want to have to replace them too often. We are assuming there will be a point when we have to replace bathrooms and kitchens but we want them to last as long as possible. For example, we build high quality kitchen units but give ourselves the flexibility to change the doors.
We are hoping to move towards using modular construction. It provides a higher quality long-term finish, that makes it easier for ongoing maintenance. Because the components are built in a factory, there is more consistency in the quality. Speed of construction is also important – every day that we can save on the construction process is a day we can get extra rent.
We are hearing demand from more people wanting to rent and not wanting to buy
Is build to rent set to ride out Brexit no matter what happens to house prices?
There is a natural hedge in investment into the rental sector. In times of economic uncertainty people put off large decisions like house buying, but they still need to live somewhere. Anecdotally, following the referendum, we are hearing demand from more people wanting to rent and not wanting to buy. When we look round the world to established build to rent markets, such as the US, the rental sector provides consistent demand to the construction industry regardless of market conditions – it is less cyclical than building for sale.
Also, our expectation is that there is going to be less competition for land between now and the end of the year as traditional housebuilders pause land acquisition programmes.
The one downside is that a falling pound means construction materials purchased overseas become more expensive – a lot of cladding comes from abroad. But other overseas investors are seeing the exchange rate as an investment opportunity.
How do you go about selecting architects, given that build to rent is a new sector and so difficult to judge practices’ track records?
I think it needs innovation. We need people to consider how design should be altered when you are taking a long term view to investment. We purchased the Walthamstow site first and while we were working with Assael we found the Bristol site and asked them to get involved. We reviewed the market and felt they understood the difference between a building designed for rent and one for sale. Architects we have worked with have liked the freedom of thinking long term.
We won’t look at any scheme of less than 150 apartments
Are there any overseas models that you would like to emulate?
The UK is a bit of an outlier in not having an institutionally run rental sector. Most countries have it already. There is a difference in culture between, say, the US and the Netherlands. In the Netherlands, the high end market may have a gym, but it may not. It may have a concierge or it may not. In the US, even the mid-range market would always have a gym and a pool. Different consumers expect different things and we are going to find out what UK consumers are willing to pay for and what they value.
Why is scale important?
We are going for a mass-market product but providing a high-end service. We think we can deliver that through scale. We won’t look at any scheme of less than 150 apartments, and have considered developments of more than 1,000 units. In many cases, this means it is cheaper to provide a better service. If you have a large scheme you can afford to have permanent maintenance staff based onsite. It is cheaper and better for residents than having a call-out service.
Ferry lane walthamstow assael legal and general 2
Does the model work better in some parts of the UK than others?
The only areas where we think it starts to struggle are the highest value areas. In order to pay for the land in London’s zone 1, you might have to charge £3,000 a month for a one-bedroom apartment and only a small number of people are willing to pay that. As you get further out it becomes more affordable and there is a bigger market.
Are you striving to create a house style, similar to Peabody in the 19th century?
We are working to establish a consistent design approach across the schemes. We have a working document that is being drawn up at the moment, and it will evolve. Assael Architecture is leading on the design side, and we are taking advice from consultants on the operational side – such as how having a 24-hour concierge affects the design of the entrance area. The building design will reflect how we operate rather than the other way round.
A lot about it is about establishing a community with residents. We would like them to like where they live and stay for a long time. Within the apartments there will be a lot of similarity – we have worked out an optimal design for two people sharing an apartment.
Our aim is to complete 1,000 apartments a year from 2019
What sizes of flat are you providing in your schemes?
We are focused on high density urban locations and are doing studios up to three-bedroom apartments. We have a preference for one and two-bedroom flats over studios and three-bedroom apartments because that is where the demand is.
Do you sense political support for what you are trying to achieve?
There have been public statements from the housing minister [Brandon Lewis, who has recently been replaced by Gavin Barwell] and London mayor Sadiq Khan encouraging the sector. Politicians recognise it is an important part of providing tenure choice. The government is looking to increase housing supply significantly, and our aim is to complete 1,000 apartments a year, every year from 2019. The build to rent sector is not the whole answer, but it might be able to provide 10 per cent of the new homes we need.
Locally, politicians recognise that these developments are fully occupied – they aren’t second homes or investments by investors. These schemes have a higher impact on providing housing for people who are looking for accommodation than flats for sale.