The definition of PRS, the high design standards required, and the speculative nature of an asset still in its infancy were discussed by a panel of high-profile speakers from across the residential industry at Place North West’s latest PRS development breakfast.
More than 100 people attended the event, held at Holiday Inn Manchester city centre, and sponsored by Mills & Reeve and Premier Guarantee. The debate drew out some of the challenges of the emerging PRS market, including defining the needs of the end user, what additional amenities would prove most popular, avoiding value-engineering, and how to build a thriving community in what is still an unproven rental market.
David Roberts, partner at Mills & Reeve: “There’s been institutional interest in the private rented sector, also known as build-to-rent, since 2011, and by 2016 it is evolving as a distinct asset class. But is it fully established yet?
“London and Manchester are the two dominant locations for PRS in the UK. The appeal is the demographic; in Manchester there’s 2.55m people, and 30% of those are aged 20-34, find it harder to get mortgages and can’t buy newbuild homes.
“PRS landlords’ research is geared towards what the ‘customer’ wants, not the ‘tenant’, as this type of housing is more akin to the hotel or hospitality sector. Effective management is key, and to ignore that runs the risk of the scheme not being successful.
“While the sector is still in its infancy, a clawback covenant is being used by some local authorities to encourage developers to go with build-to-rent, which is an agreement to use the land for 10-15 years on a build-to-rent basis, but the developer can exit at a later date as long as it pays the fees that would have been associated with the site’s use as a standard newbuild from the start.
“Viability for build-to-rent is fragile, so you need to know your market. Build-to-rent is defined by its front of house; the schemes have a clear identity, and a concierge. They’re not sterile apartment blocks, the customers want an interactive space and to feel part of that building. They’re focused on location, affordability, the opportunity for add-ons, and great service, which will keep them in build-to-rent more long-term.”
Phil Mayall, director of Muse Developments and English Cities Fund: “At English Cities Fund’s New Bailey in Salford, we are fully funded by Legal & General in partnership with a Dutch fund, and that’s interesting in itself, as L&G decided halfway through the process to pair with a Dutch fund, in order to benefit from its experience.
“New Bailey has been designed as PRS from the start. We didn’t and don’t know where the sector is heading, so we went for flexibility on the ground floor, which has been built to shell, and the apartments have been designed around the Urban Land Institute report which is in common use now. If you’re building 135 units at a £20m cost, adding in some extras like additional lift space is not actually that much.
“It’s an interesting time, and we’re not there yet in terms of knowing what the customer wants. The PRS concept is more developed on the continent, but they are different cultures to ours.
“The open market is also becoming aligned with PRS in terms of design, as why wouldn’t any tenant want good fixtures, to be dealt with professionally, and to rent in the right format?”
Nathan Cornish, director at Urban Splash
“We have 850 homes under management, in partnership with Places for People. In terms of gross-to-net yield, we’ve experienced that residential property is vastly different to commercial.
“We’ve not yet built anything specifically for PRS. For us, as with all developers at the moment, the biggest challenge is build cost. PRS is numbers-based and marginal. Building modular units has its appeal for this reason, but you can’t just build modular to increase speed, you still need to focus on quality.
“Adding in gyms and additional amenities is not the sole preserve of PRS, Urban Splash has been incorporating these into its schemes since the 1990s.
“At the moment all the discussions around PRS are hypothetical, based on spreadsheets and predicted returns. We’re still in the proof-of-concept stage, and at the moment institutional investors are only making up about 1% of the residential market.”
Simon Ismail, director of Salboy: “We’re working on two major schemes which have consent on in Salford, at Trinity Way and the Crescent [partnered with Betfred owner Fred Done], which are specifically designed PRS villages. We plan to retain all the units to become a professional PRS landlord. In the normal rented market, 80% of rented properties are owned by minor landlords who may only be looking after one property, which are often substandard and at an inflated rent. The Government now wants to institutionalise and professionalise the sector.
“I think PRS and build-to-rent are distinctly different terms. In build-to-rent, the units are often sold overseas, the landlords never actually see the properties, and they’re not focused on management, which is entirely different to PRS.
“If you’re looking at PRS for the most return for your capital, then it is not the asset class for you. Funds need to get a return on their investment, and the mid-level funds that are the most active and aggressive want 8% gross and 6% net return, and that just won’t work with PRS right now.
“You get into a dangerous game of value-engineering. The sweet spot for investment would be around 240 units, but if the site requires more massing than that, you’d have to reduce it for the fund, which might not be the right thing for the city or for the service-led industry.
“The concept is we want to create a place where people want to stay, and a community which can be kept within the scheme. We’re scratching the surface as PRS is unproven in the UK, but it’s proven around the world.”
Chris Findley, assistant director of planning and transport at Salford City Council
“PRS has come out of left field from a planning authority point of view, and it’s been coming at us fast since the crash. During the recession, we were producing plans which were scaling back quantums, and now it’s all back in a big way.
“I’ve heard ‘ours is a proper PRS scheme, unlike all the others’ from developers several times, and the first time I was impressed, but by the third or fourth time I realised there was a lot of work to be done to find out what PRS really is. It’s been a steep learning curve, and particularly when it comes to section 106 agreements, as that has involved very detailed discussions of the viability around each individual scheme.
“Every project is different, so I’m left unsure as to whether PRS is one thing or many things. As a planning authority we want to create good places that work, and are still working in 40 years’ time, but as this is a new model, a lot of trust is involved.
“Within the Government’s agenda, there is still a big push into home ownership, and starter homes rather than affordable homes, which is worrying as I don’t think that will work in a Greater Manchester context.”
Euan Kellie, managing director of Euan Kellie Property Solution: “How PRS is different to other types of residential is a qualitative point. PRS is still raw, and is a residential use class, but it is qualitative; it’s all about design at the centre, the management element, and that’s the first thing you look at with PRS, the ethos and the shared space.
“There’s ample evidence to support PRS. There’s a driver at the moment for housing full stop, but statistics show that the residential market is moving towards this type of tenure. Generation Z, those who graduated around 2010, are now coming into industry in a different way. The job market is fluid, there’s less aspiration for owning your own property, and those trends will only continue.
“As the market blossoms it will develop a competitive edge, and quality will be the differentiator, and tenants will spend more for that quality. In the US, PRS brands manage blocks in multiple cities, and if you live in New York but you’re visiting Philadelphia for a few days, you can stay in the same company’s building.
“There’s arguments that PRS should be a separate use class, but I don’t think we need it, it wouldn’t help the system, and there are enough control mechanisms in place already to need to talk about changing plans.”
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