Flat Findings: Market Distinctions & Opportunities in the UK and US by David Danish, RealPage

Aside from the obvious differences between the Queen’s English and whatever it is that we’re meant to speak over here across the Atlantic, working with owners and operators in the build-to-let sector on both sides of the pond is a continuous learning experience.  Adopting a whole new vocabulary, though, has been only one of the many interesting aspects of comparing what we have seen so far in the U.K. vs. the state of the industry in the U.S.

Finding Opportunities: Professionally Managed Flats

Years before RealPage established a permanent footprint in the U.K. with the acquisition of PEX, we began to learn about the U.K. market through the lens of a variety of owners, operators and investors across the country.  There are a few primary differences that have struck me to-date, though – all of which are likely to shift over time given the tremendous rate of change that this fledgling sector is experiencing across the Isle.  While the traveler in me would much prefer to focus on our similarities rather than our differences, the consultant in me finds that what separates the two markets right now offers far more opportunity for growth.

To begin, U.K. schemes have a terrific opportunity to differentiate themselves as “professionally managed flats” – distinct from the privately-held units that in most cases cannot compete with offerings such as on-site caretakers, a dedicated lettings team, and beautifully shared spaces for relaxing, entertaining or exercising.   In addition, anxious private landlords may hesitate to offer a desirable tenancy of 12-months or longer whereas most build-to-rent owners we’ve worked with are happy to provide this stability to their perspective residents.

Finding Opportunities: Flat-Specific Amenity Valuation
Another distinction of the U.K. build-to-rent sector is that the concept of identifying, recording and assigning a value to flat-specific amenities is still in its relative infancy.  Notating which specific flats have the most desirable views or the beautifully upgraded kitchens—and documenting it within the property management software—will afford owners the opportunity to market at the right rate for quicker letting, while still achieving optimal rents.  Building this functionality right into the software ensures that each flat is priced right, relative to others within the building without having to re-walk them every time they become available to let.

U.S. schemes will typically have a thorough list of particulars/amenities assigned to each flat with a dollar amount attached to make each unit equally popular, relative to others within the same scheme.  Common amenities in the U.S. include:

• Washer & Dryer
• Balcony
• Upgrade/Refurbishment
• Pool View

Snapshot: Amenity Value Impact on Schemes (By Class)

In a Class A scheme, these amenity values average over 6% of the total rent roll.  The popularity of specific particulars will vary across markets.  An outdoor space such as a balcony, for example, may garner a heftier premium overlooking the sea in Brighton than it would in Manchester.

Finding Opportunities: Flexible Tenancies

Finally, another divergence between how our partners in the U.K. operate today and what we commonly see in the U.S. is the approach taken to offer “flexibility” to our residents when it comes to their tenancy. Primary examples of these disparities include:

• UK. lettings often have the option for a break-clause at the 6-month point, at no additional cost to the tenant
  • The potential for a mid-term lease-break creates uncertainty in forecasting and managing availability for the scheme
  • Off-cycle void notices create barriers to rent roll growth if they occur during the low season in the market
• US. tenants are typically charged a premium if they desire the flexibility of a tenancy shorter than 12-months
  • The amount assessed will correlate to the increased revenue risk associated with potentially having to redecorate a flat more than once every 12 months
  • Tenancies greater than 12 months may be offered to support adherence to an expiration management schedule that as closely as possible mirrors the seasonal demand patterns of the market
    • In many cases, longer tenancies will be offered at a slight discount to build stability into the rent roll and minimize void periods without impacting offered rents
  • If a U.S. resident does not sign a renewal contract prior to the expiration of their initial lease contract, they will typically incur a significant increase to roll periodically
    • Pricing structures have adapted to incentivize resident behaviors that support stronger revenue performance of the scheme

Snapshot: Longer Lease Terms Add Up

The accompanying chart is an analysis of over 8,000 stabilized schemes utilizing the RealPage platform in the U.S. from June of 2017 to June of 2018, revealing that nearly 50% of tenancies are 11 to 12 months in length, with a significant percentage of U.S. letters opting for tenancy agreements longer than 12 months.

As we expand our partnerships in the U.K, it remains to be seen just how the build-to-rent sector will evolve.  Without a doubt, some aspects of the industry will mirror common practices in the U.S., while others will take on a uniquely British twist. Look for subsequent market insights shared by our team as we learn more about this burgeoning market and help accelerate its growth, working side-by-side with our clients, colleagues and peers.