Interview with Arcadis about UK Build to Rent

BTR News talks to Arcadis about Build to Rent in the UK, the construction market and the direction it's heading.

Family with shopping going to their Build to Rent home - Arcadis | BTR News

BTR News talks with Will Waller, Build to Rent Market Lead and Chris Jones, Residential Development Lead of Arcadis about Build to Rent in the UK, the construction market and the direction it’s heading.

What are you seeing in the construction marketplace?

Will:

As is widely reported, the construction industry has been seeing a good recovery, firing on all cylinders as pandemic-related restrictions have eased. This is off the back of increasing investor confidence as life continues to return to greater normality. The Build to Rent sector has actually been very resilient during the pandemic, evidenced by relatively limited tenant churn and continued investment activity. 

Some of the knock-on effects of a heating construction industry may present a challenge for developers in the sector. Materials availability and cost inflation has been widely reported as a challenge. Materials price inflation could hit a double digit % in this year. About 20-30% of a typical project’s value is in commodities and ‘value added’ materials, so this can have an impact. However continued inflation and longer lead times of materials are expected to begin to stabilise towards the end of this year, which will be welcomed by those developing in the Build to Rent sector.  

Chris:

As Will says, the construction industry generally has heated and particularly the residential sector. The Build to Rent sector has shown great resilience throughout the pandemic and the numbers are impressive. According to BPF and Savills, approximately 10,000 Build to Rent homes have been completed per annum over the last few years, and in H1 2021 a record level of investment in the sector has been reported.

Coupled with a real pivot towards single-family Build to Rent, which some analysts think could grow to be ten times bigger than multifamily Build to Rent within a decade, and exciting new players such as John Lewis and Lloyds Bank entering the arena as well as innovative partnership arrangements, the Build to Rent sector really is a brilliant place to be and continues to go from strength to strength. This reflects the fact that the general demand and supply imbalances remain, emphasising the opportunity in large scale, purpose-built rental accommodation across all regions in the UK.

What are some key aspects those developing in the Build to Rent sector should be aware of?

Will:

Will Waller, Build to Rent Market Lead, Arcadis | BTR News

We’ve touched on some of the dynamics around materials at the moment, which is definitely an area clients should be cognizant of. We are working with clients to help manage and mitigate the effects as far as possible.

A different – but another key area – Build to Rent investors and developers should consider is the Future Homes Standard. The Future Homes Standard will be fully implemented in 2025. It will deliver homes that are ‘zero carbon ready’ and which do not feature a fossil fuel heat source. Interim changes to Part L 2013 will apply from June 2022 onwards and will require 31% less CO2 emissions compared to current standards.  These changes are significant, and developers need to start considering them now.

That said, I hasten to add that the sector is typically at the leading edge here, already recognising the customer, societal, operational and commercial benefits of driving decarbonisation. We recently undertook a study to look at what the likely commercial impact of the Future Home Standard requirements would be across both apartment and house products. There is likely to be an initial cost impact associated with meeting and exceeding the new standards, however this is likely to normalise over time and there are also value opportunities to be looked at. There is no standard ‘one size fits all’ answer so there will be different approaches depending on the type of organisation, their targets, aspirations and customers. 

Chris:

Generally, the ongoing viability challenge the Build to Rent sector faces, and what Will has said around construction costs and regulatory changes such as the Future Homes Standard play a role in this. We work extensively with clients across the sector, including from the earliest stages of the project lifecycle and one of the things my team focus on is supporting clients with the viability of their projects.

Chris Jones, Residential Development Lead, Arcadis | BTR News

We recently undertook a study of viability dynamics in the Build to Rent sector and identified key levers clients can pull. For example, our study identified how critical negotiation around affordable provision can be for Build to Rent projects to boost project viability and increase that overall additionality and much needed housing that the Build to Rent sector drives so well.

To support this further, Local Planning Authorities need to be progressive in adopting Build to Rent and Discounted Market Rent (DMR) into their Local Plans, and also recognise that Build to Rent products will differ from a more traditional for sale model – the requirement for car parking for example. Furthermore, we identified that a reduction in operational leakage can drive hiked annualised returns. Hence making operations more efficient and optimising the capex – opex relationship is a crucial factor in making Build to Rent projects stack up for many clients.

On affordable housing provision, I see it as a positive that purpose built Build to Rent schemes should not be required to provide any First Homes, something that may have put more pressure on the viability stack. Ultimately though, our view is that collaboration is key. We work with clients to enable and support collaborative partnerships and arrangements and in our experience,  these can work very well to unlock delivery of projects to the benefit of all parties.

Where do you think the Build to Rent sector is heading?

Will:

Well my personal view is that there is a lot of growth to go! For me it comes down to the value proposition for end customers. This model is hospitality driven and the Build to Rent sector’s proposition is highly compelling for customers when compared against other rental options in the market. Whilst there are a lot of well managed and quality rental offers outside the Build to Rent sector, there are also a lot of options outside the Build to Rent sector that do not tick those boxes. The opportunity to outcompete and displace the offers that do not tick those boxes is significant and will remain for a long time. 

Additionally, customer recognition of Build to Rent, what it is and what it has to offer can only increase. I am also really excited to continue to see how the sector continues to capitalise on the opportunities around intelligent buildings and net zero, both areas where Arcadis works to support our clients, to further enhance customer experience and operational efficiency.

Chris:

Growth and opportunity. Having led a team on the development consultancy side for many years, I’ve seen firsthand how the sector has evolved and grown which is supported by its counter cyclical characteristics, providing options and a better outcome for those seeking quality accommodation. It’s absolutely fantastic and there are so many opportunities before it for all stakeholders to the development cycle.

I think increased tenure diversification and multi tenure models, partnerships, and heightened collaboration in conjunction with an overall better understanding of the asset-class can continue the momentum and create an even more fertile environment for Build to Rent to excel. I think we are also increasingly seeing potential opportunities for a ‘multi-generational’ asset class to develop, that wraps in aspects of Build to Rent with student and later living offers. For end customers, I think this is all really great, as the choice of well serviced high-quality accommodation increases it can create a ripple effect across the PRS sector generally.