One of the biggest advantages yet biggest barriers of Build to Rent (BTR) is that developers and operators take the long-term view.
They don’t build and walk away, like a traditional house builder, and as a result there are a lot more happy tenants, and happy local authorities.
But this structure has a massive impact on business practice and it’s a lot more expensive up front. While other investors look to trade at different stages of the asset’s life cycle, a BTR fund aims to hold for long-term income.
That means, from day one, income needs to maximised and costs streamlined, because it’s so much more expensive to build.
Traditionally, to make returns stack up, operators have had to take on development risk, which has in turn led to problems around finance. Typically banks will only lend on permitted schemes and are increasingly being discouraged from risk by regulators. Likewise many institutions will only touch stabilised assets.
But buoyed by the fundamentals of the market and by the positive political support, the signs are more positive right now.
And appropriate explanation, planning and development of that long-term development model can also go a long way to encouraging lenders: essentially by showing a greater focus on what happens post development.
This means, practically, ensuring the scheme is in the right location and has the right attributes for the rental market. It also means focusing on the operator is and what the gross-to-net margins look like. There will be considerations around amenity and layout, but also the building materials used and their longevity.
It also means more focus on the assumptions of development: assumed rents and how they compare to the local market average, and gross to net leakage, which is generally considered to be at least 30% – are the most important.
For management, it means seeing if a sinking fund has already been set up, to ensure buildings remain as good as they are on day one, and how the operation of the building has been planned, whether with an in house or external agent.
The more a developer operator can show it has been thinking about this now, and importantly making realistic assumptions, the easier it will be for a lender to stump up the cash.
It’s a long-term investment, which means we should already have long term plans. Simple, no?