Optimising the value of build-to-rent

Posted 17.07.2024

Residential

The build-to-rent (BTR) sector is expanding, and developers are keen to understand where the opportunities lie in order to align their product with local preferences and market conditions. Make believes regardless of location, the hidden value of BTR lies in long-term ‘sticky tenants’.

Established BTR operators are familiar with the cost of high turnover in rental units. Replacing tenants is one of the primary cost drivers for operators. The ongoing expenses of short-term vacancies, including marketing, redecorating, can significantly reduce margins on a BTR operational model. The BTR market has expanded from the highly mobile young professional audience it was initially targeted towards to also cater for alternative, more stable markets with greater potential to become long-term tenants.

Understanding the needs of residents is key to retaining them long term, as is building trusted and compelling brands. Developers need to be nimble in adapting their models as they learn what residents will pay and stay for.

Using a lobby as multifunctional communal space can provide amenity and a sense of community through chance encounters as soon as residents enter the front door.

Amenity versus service

Building and operating on-site amenities comes with significant costs, including staffing. Therefore, balancing the delivery of an exceptional resident experience with cost-effective rents is a challenge.

Initially, BTR operators thought residents were making a ‘lifestyle choice’, so they invested in generous amenities. However, it’s now emerging that life’s daily necessities, such as storage solutions, rather than luxuries, are becoming a primary driver. People still aspire to eventually own a home, so in the meantime, they aim to save money and keep their rent reasonable while benefiting from the flexibility and simplicity of renting. This is leading to changes in thinking about amenity, with operators focusing on the amenities residents genuinely use. Much like the hospitality industry, build-to-rent is an operations-driven model. The product is the service, and service is the differentiator. By understanding what tenants need and focusing on services and the experience provided, BTR operators can create a unique and desirable product.

The BTR industry is now recalibrating, with more operators listening and providing services and experiences that meet needs and simplify or reduce living costs. Services like pet care, package handling, storage solutions, guestrooms, and car-pooling are proving useful investments in the UK market. Effective management is crucial for delivering these services and building tenant loyalty.

That’s not to say that communal amenities such as gyms, pools and co-working spaces aren’t important — they are – but the focus should be on simple, flexible spaces that support physical and mental wellbeing, and foster a sense of community. Critically, proper management of these spaces is just as vital as the provision, as poorly managed communal areas can detract from a building’s appeal and the developer’s reputation.

Flexibility and lifestyle benefits

Building in flexibility, whether within the homes themselves or the communal spaces, allows asset owners to be responsive to residents’ needs and an evolving market. To help ensure communal spaces in particular are well used and worth the investment, they should be capable of being reconfigured to support multiple uses at different times, with adequate storage to support this multifunctionality.

Initially, BTR developments focused on high-earning young professionals by offering smaller units and luxurious amenities. However, this generation of renters is highly mobile and constantly changing. BTR developers are now realising the advantages of targeting a broader market, including families, empty nesters, and older individuals, who tend to be more stable, long-term ‘sticky’ tenants. Developers need to be flexible in designing for a wide range of different needs in an ever-changing society – especially from the perspective of a long-term operational business model.

From the young to the elderly, sharers and single parents through to multi-generational and extended families, the diversity of homes is clearly an important factor for operators to address if they want to attract a wide range of tenants.

Diversity is key to meeting people’s changing lifestyles

At Make, we conducted demographic research which identified over 20 different household configurations in the UK with varied needs for space and privacy. Meanwhile, at our global roundtable events hosted in London and Australia across 2022-2023, we heard developers speak about the advantages of maximising choice and variety to increase their market share. So diversity of homes is clearly an important factor for operators to address if they want to attract a wide range of tenants. To support diverse living arrangements and configurations, our design team developed a ‘toolkit’ of adaptable apartment designs, which contains a wide variety of floorplans to meet the specific needs of the many household types that our research identified. The toolkit also incorporates features that reflect the changing lifestyle patterns and trends we’re seeing, such as working from home. This toolkit approach will also support tenants’ evolving needs over time, allowing them to rent only what they need. This has the added benefit of simultaneously bolstering an operator’s offer.

Communal spaces should be capable of being reconfigured to support multiple uses at different times with adequate storage to support this multifunctionality. For example, as a cinema or a bookable dining event.

Fostering a sense of community is the key to long-term value

Creating places that bring people together and connect them with the wider communities in their neighbourhoods is essential for driving long-term value, both for the people who live in the places we build, and for the developers who provide them.

The emerging lesson from BTR developments worldwide is that understanding the demographic, social and cultural diversity of the target market naturally leads to fostering a sense of community. Likewise, providing meaningful and flexible amenity, both in the way it can be used and how it responds to diverse and changing needs, is underpinned by this understanding of place and community.