Private Rental Sector – a Naturally Sustainable Approach

In a recent discussion with clients in the PRS sector a number of issues came up for discussion where the private rental market takes a different approach to the speculative housing market and the affordable housing market. These five issues are key to the success or failure of the private rental sector and at the same time seem to me to naturally point towards the design of more sustainable buildings than an equivalent project in the speculative or affordable housing sectors.

1. A PRS landlord is interested in the long term quality of the building: Private rental is a real market, if tenants don’t like it they can leave. Most modern tenancies are short and if the landlord treats people badly, or if a better offer shows up nearby, the tenant will leave. This ensures that PRS landlords will be kept on their toes for the duration of their ownership of the building. The building becomes a live asset, not a sunk cost. This will encourage landlords to maintain their buildings, keep their energy plant well maintained, and to ensure that services are running smoothly. Badly run buildings will lose their tenants more quickly than a well run one. PRS landlords will naturally tend towards better quality design that appeals to the current market. Low energy and high quality buildings will be more attractive to the market.

2. A PRS landlord is interested in the long term performance of the building: The success and failure of private rented buildings at a large scale, is maintaining a margin between operating costs and the rental income. If there is no margin, there is no business. This drives the design of private rented buildings to be efficient in their running and maintenance. The desire to cut out waste is essential to running any sustainable business, so the natural behaviour of PRS management will tend towards a more sustainable business model. The building will be designed to use space efficiently, and to be built with little or no waste.

3. A PRS landlord is interested in the comfort and wellbeing of the resident: Resident comfort and satisfaction will be more important to a PRS landlord than to any other landlord, as this is a key reason for people to stay or to leave. A building that is poorly designed or constructed will have less appeal to residents than a well designed and well constructed one. A building that overheats or is difficult to heat, or where residents can hear their neighbours conversations or music will have a quicker ‘churn’ of tenants. This is more likely to lead landlords who procure a PRS building to ensure that it is well-designed for the residents comfort in the long term.

4. A PRS landlord is interested in the lifecycle cost of the building: The operational cost of a PRS asset will as important to a landlord as its capital cost. In a speculative building the capital cost is everything as the speculative developer has no involvement in the long-term running of the building. This will naturally lead to a more sustainable decision-making process where a balanced discussion can be had as to whether it is better to build using better materials, (in the sense of durability, ease of maintenance,) or whether to use a cheaper material and have to replace it or repair it more often. In a speculative development something that looks good at the beginning is always favoured over something that costs more but will look good in the longer term. It is normal for a PRS client to consider the life-cycle cost of materials and services, and unheard of for a speculative developer to do so.

5. The PRS landlord cares about the long term usefulness and appeal of the building: A PRS landlord has a difficult task as a client to forecast what the market will be like in the future. Will tenants prefer more space, better light, faster broadband? What will future tenants crave that current tenants don’t care about. This means that the PRS landlord must naturally keep an eye on trends for the future rather than living off the trends from the past. A good example is car parking. A speculative developer will insist on including a lot of parking spaces as history says that parking spaces sell homes. In an urban environment this is increasingly not the case, and a PRS landlord will be aware of this and won’t want to take up more valuable space with cars than absolutely necessary.

It is interesting to me that all of these considerations apply to the affordable housing sector too, but because the affordable tenant doesn’t have much choice and rarely wants to leave, these considerations don’t apply as much as one might think. There is a shortage of affordable housing for rent, so the chances of a tenant leaving are less, and tenant concerns are less high up the list of priorities than they could be.

Similarly, the speculative housing sector is dominated by demand, so there is little competition in a specific areas and purchasers have few options. There is no need for speculative developers to consider these issues as the private sale market isn’t working in the interests of the purchaser.

It will be interesting to see how the housing supply chain in the UK rises to the challenge of the institutionally invested private rental building. The standards will be different, the approach will be different, and anyone who approaches it in the same way as a normal speculative housing project will be missing the point, and missing an opportunity to create a long-term, high quality sustainable asset.

 

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6 thoughts on “Private Rental Sector – a Naturally Sustainable Approach

  1. This is a really interesting piece and PRS is a sector that urgently needs to be adressed in terms of energy efficiency. The points are well made and I know the article is geared towards new build rather than existing buildings.However, I think it’s worth pointing out that the situation is not so positive in the existing building sector, expecially in London. Owning a property in the capital is equivalent to putting your money in an extremely high interest account, with rental income a tasty bonus. There is little incentive to landlords to maintain their properties to any kind of energy standards as demand for flats is high and supply low. Furthermore, the rapid turnover of tenants can be seen as a positive thing as it allows the lanldord to crank up prices regulalry, in line with rapid rent inflation. I believe persuading existing landlords to retrofit their properties for energy demand reduction will be quite a challenge!

    • Thanks Carrie, I realise that I am talking in slightly Utopian terms about future PRS which will be large scale buildings designed and constructed as PRS for institutional investors, rather than the current ad hoc conversion of existing properties by a cottage industry. The two could hardly be further apart.
      Turnover of tenants is not necessarily a bad thing as it reflects peoples desires to move on, or the naturally transient nature of a proportion of any cities population.

  2. This sounds great in principle – but it only works where there is enough housing that potential renters have a choice. Here in Cambridge, and probably in large areas of London, there is massive demand and it is a sellers market. It is the same as with EPC ratings in the ownership market – in the south east and parts of the East of England there was hardly any difference in price due to energy rating.
    http://energy-surprises.blogspot.co.uk/2013/06/improving-your-house-energy-efficiency.html

  3. I agree Nicola that choice plays a big part in this. I expect that local authorities will need to be more flexible in granting permission for PRS developments that cater for that part of the population that is not interested in purchasing.

  4. I think the PRS could well stimulate significant rethinks in home design and construction (and modification – to meet the conflicting challenges of our housing needs and land use priorities we need to modify old resi, commercial and other stock as well as build anew). However, as with many nascent industries (and build-to-rent is that in the UK), a single model is unlikely to predominate. We are bound to see significant divergence. A couple of models to consider:
    Large scale lowest lifetime cost – think large volume car manufacturing, with shared components/platforms, modular construction, quasi-infinite ‘mass-customisation’ but common maintenance rpocesses, parts etc.
    Small scale, premium branded – these offerings will be branded (the living package, not just the construction) and offer quality of life advantages over the mass offerings.
    Exploring what these two might mean in detail, adn the sustainability implications, as wellas other variants that might gain favour, and boundiing that exploration in customer and investor needs (eg L/T sustanable rental yields and preservation of asset values) are key to understanding the future.
    One final thought: although PRS investor incentives are better aligned with the sustainability agenda than, say, speculative building, they are not fully so. The following things remain gaps, each of which could be addressed by public policy initiatives:
    1. Energy ‘running’ costs are typically borne by tenants, not investors. There are two ways around this – insisting that landlords bear the costs (which in itself then creates significant moral hazard), or increased transparency at the time of occupation on future running costs (perhas even guaranteed low rates from energy companies for building meeting and maintained to certain standards?)
    2. Lifcycle costs still do not include dismantling/disposal. And even if they did, with typical discount rates these costs would be meaningless to most investors in new projects. Using a discount rate of just 10%, costs expected in year 50 of a project are valued at the outset at just 7.7% of cost, while costs expected in year 100 are valued at 0.6% of cost (in real terms)

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