It’s time to replace the flawed science of Gross to Net as BTR evolves

Una Living reflects on the performance of the Build to Rent sector, and the importance of OPEX in a scheme’s operation.

By Mary-Anne Bowring, CEO, Unity Living (Ringley Group) | BTR News
By Mary-Anne Bowring, CEO, Unity Living (Ringley Group).

While the Build to Rent sector experienced a more subdued 2023, it continued to perform well and is again expected to outpace the headline level of growth this year despite seeing fewer completions.

By Mary-Anne Bowring, Una Living, part of Ringley Group

Average rents rose by around 6% across the last 12 months according to CBRE, which predicts a similar rate of growth for 2024. It’s a rosy outlook for Build to Rent, with more stable yields expected to boost investor confidence.

However, while it’s positive to see the asset class performing well, the industry has been slow to adapt the way Build to Rent assets are operated.

When considering Gross to Net – the ratio by which gross rental income is reduced to a net sum after the developer or investor has paid for the running and maintenance of the building – we need to rethink the way that Operating Expenditure (OPEX) is calculated. We need to stop talking about Gross to Net as a percentage and instead start looking at the unit costs.

OPEX is the key metric used to run a Build to Rent scheme, incorporating elements like facilities management, individual unit expenditure, tenancy changeover costs and any on-site staffing costs and operator/letting agent costs. These costs are often significant for Build to Rent assets, which rely on their breadth of amenities and community offering to attract tenants, drive rent premium and limit voids.

We now operate Build to Rent schemes across the country, from London right up to the North East – while physical building maintenance costs, all other things being equal, will not differ as much as one expects between the North and South, rental values will. Mathematically, with lower rents in the North this would reduce scary OPEX results.

The OPEX is dictated by a building’s height, the plant installed, its amenity offering, staffing strategy and the rents that can be achieved. Given lower rents, to get a good OPEX result in the north, either the scale must be significantly increased or other things need to be scaled back, including the building’s height, amenity and staff provision. As a result, the science of using Gross Net as a percentage is misleading at best.    

As the industry evolves, it’s vital that we are reassessing the financial mechanics too. There are several alternative methods that would prove a more accurate, appropriate measurement metric for what is now a maturing asset class.

For example, a cost per bed calculation warrants further investigation – this is the norm in student housing and is easily portable for co-living. Where a cost per bed proves problematic, for example in larger units where the ratio of bed to living space varies, a cost per sq ft is particularly useful and is the norm for high end block management.

A universal bed rate or sq ft rate is easier to articulate and enables the operational efficiency of how a building is run to be assessed much more easily scheme-to-scheme. It can then be layered for building and facilities management, leasing, staffing and amenity, plus operator or in-house asset and property management costs.

For operators, the goal is to make the OPEX as favourable as possible. In no particular order, there are several ways do achieve this.

The first and most obvious method is the reduction of voids to drive income; we monitor both void rent loss and void utility loss, boosting the Net Operating Income and cutting standing costs. Tech enablement is the second option, with elements including renewals, substitutions, and listings all automated, with instant reporting and customer self-service where appropriate.

It’s also vital to note the benefit of building community through amenity curation, reducing ‘churn’ leavers and boosting renewals.

Finally, operators should review the performance of plant and maintenance costs, furniture, and void refurbishment specification and costs, alongside environmental lifecycle costing and disposal.

We track affordability carefully to understand and assess whether there is room to increase rents; it is about much more than competing stock. Similarly, sometimes the building’s capabilities provide opportunities for innovation and, following improvements, a subsequent increase in rents.

We undoubtedly need to make light work of the granularity that residential investment brings as the Build to Rent industry – and its offer – continues its natural evolution. Single-family housing will bring new challenges; having seen significant investment in 2023 (40% of Build to Rent investment), it is expected to continue gaining ground.

We know that finding OPEX efficiencies and reducing leakage is key to driving Gross to Net values upwards, increasing operational income and maximising returns for investors. However, in doing so, it’s vital that we ensure that the operational metrics are fair and equitable as the Build to Rent sector continues to evolve.