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Blazing a trail in build-to-rent An interview with Jonathon Ivory, MD of Atlas Residential

Face to Face

Jonathon Ivory is managing director of Atlas Residential, a US-owned company that wants to build 10,000 build-to-rent units in the UK, with three sites already under construction. He explains the risks and challenges involved in blazing a trail in this burgeoning sector of the market.

You are being quite brave in embarking on a drive to build new multi-unit blocks for residential rental, I say, given how dormant the build-to-rent market in the UK has been for decades. (I mean brave in the sense that a civil servant like Sir Humphrey in Yes Minister would use the term – as in career-threatening if wrong.) But Ivory, a former real estate investment banker, a profession that rarely takes a backward step, is having none of that.

“Can I pick up on your point about being brave? We don’t think that’s necessarily the case. People have been renting, whether it’s houses or apartments, since the country has been building them. It’s just that the ownership of those apartments hasn’t been in what we call institutional hands really since the 70s. All we’re really doing is reintroducing a form of ownership that previously existed and overlaying on top of that a level of professionalism and customer service that we think residents, whether they’re British, North American or wherever, will react positively to. Everyone likes being looked after and treated well. I wouldn’t say we were disrupting or reinventing the wheel. We’re simply doing something that Brits have been used to for decades and we’re just doing it a little bit better. There’s no controversy in that.”

It is true, I concede, that you only have to look around the most fashionable parts of London to see scores of big mansion blocks that were built with institutional money for long term rental – but that was a long time ago, and the world and the regulatory framework was very different.

This concept has been around for a very, very long time. All we’re really doing is reintroducing that theme

“Exactly,” Ivory responds. “Essentially, the Victorians invented our business model. They didn’t use the word ‘institutions’ back then, but large landlords would wholly own and manage blocks before they were broken up on a long leasehold or freehold basis. So the concept has been around for a very, very long time. All we’re really doing is reintroducing that theme. People rent in this country. The rental inventory is in excess of £1.2 trillion in terms of appraised real estate value. So the asset class is vast and has existed for an extremely long time. So, as I said, we’re just introducing things like customer service and professionalism in a way that the UK consumer hasn’t really benefitted from for 30 or 40 years now.”

But isn’t that the point, I say. It’s beyond the memory of a lot of people that this was a model of how people used to live. Ivory agrees. “Right. And that skill set has left the industry. So, if you were a commercial fund manager for the Prudential in the 1970s, then you would’ve had, most likely, a residential portfolio within your remit. But obviously, once those portfolios were broken up and sold off, those skills were lost, to retail and office and things like that. I suppose people are having to relearn a trade, if you will.”

So let’s be clear, I say, about what it is exactly you are doing. You already have three projects underway in Southampton, Birmingham and Salford, with nearly 1,000 flats planned or under construction? “That’s correct. As a single landlord, we are building at scale and scale allows us to provide the kind of economies and efficiencies that we need to deliver the customer service that I was talking about. We have three sites presently in construction. One is now operational. It’s a little over 850 units with an appraised value north of £160 million. We will operate each building with an on site community manage, plus leasing and maintenance staff also on site.”

“The closest analogy I could draw for you would probably be that of a hotel, but without the nightly changeovers and the overheads of maids and food and beverage and things like that. It’s very much taking inspiration from the hospitality industry in terms of customer service and amenity. So we’ll have a gym or a fitness room and a residents’ club lounge or a cinema or something like that – whatever’s appropriate to that local demographic. And it will be run with a relatively small and efficient team on site who can deliver those services at the point of need, so that residents will know who their manager is, they will have a relationship with the staff there, they will be able to organise events through them and we’ll provide a forum for that, whether it be a jogging club or dinner parties or anything like that. We will also make spaces available to them to host events and birthdays.”

“More importantly, the upkeep and maintenance of the fabric of the building will be undertaken by an on-site team, which is really something you don’t see in our competition, which is the buy-to-let universe – Mom and Pop style, as Americans call it, pepper-potted apartments where the landlord is unable to provide the same level of service and management, simply due to the lack of infrastructure and scale that we’re afforded by virtue of the large schemes that we’re doing.”

So, if you are a tenant in one of the properties, do you pay a service charge on top of the rent? “No, we don’t charge a service charge. There will be a base rental payment. Typically, in an Atlas building, things like access to the fitness room and the club lounge and so on would all be free. What we will do is we will offer additional services on top of simply the apartment. We call that ‘other income’. It’s a separate line item or items in our operating cash flow. That is a very varied list. Again, it’s dependent on what that local demographic wants. It’s a menu of services that we will provide.”

“It might be dog walking, dry cleaning or having your room cleaned. Again, it’s a long list that is specific to each property and each resident demographic. Residents can choose to use those services or they can choose not to. If all they want to do is just stay in their apartment and pay their rent and pay the utilities, then that’s absolutely fine. If they choose to take advantage of the additional services that we’ve curated at each building, then they’re able to do so too.”

“Going back to the scale concept, essentially we’re a gatekeeper to a large community of residents. That gives us buying power. So, we can do things like go into the market and negotiate a broadband deal on behalf of our residents and then provide that service at a reduced cost to them that they would otherwise not be able to obtain as a single retail user. That’s a large part of our business and what we do is provide auxiliary services to our residents.”

This is about customer service and what the resident wants

As a tenant, what sort of lease am I going to be offered? What kind of terms am I going to be taking the place on? “We’re flexible with regard to leases. We will primarily offer twelve-month ASTs [assured shorthold tenancies] because that’s what most people are familiar with, but we will offer up to three years if the resident is interested in something of that length. And that’s something that the government is very keen to see us and our peers offer to increase that security of tenure. But even that in itself is an education piece because most landlords don’t offer those kinds of leases. We have found that residents are cautious and will maybe sign a twelve month AST initially and then when they come to re-lease, will realise, ‘actually, I’ve had a great time and experience in this community and so I am looking to stay longer and will sign that longer lease’. But again, we’re flexible. This is about customer service and what the resident wants. So, to the extent that we can provide that, we will.”

And what if I at one point say, ‘I want to buy this place’? What happens then? “The answer is, of course, no. What we don’t do or are very unlikely to do is sell off individual apartments. We think that will compromise the value of the asset. So, when these buildings trade, and I speak now to our US experience, they typically trade to other institutions as a whole block, either as a single community or it might be part of a wider portfolio. That’s typically where the trading occurs.”

Within your three developments, what is the mix between one, two and three bed flats? “It depends on the site. Real estate, as you’ll understand, is local. So, the unit mix, the ratio of ones to twos, the size of the units has been, to an extent, curated based on what we believe the local resident demographic profile is now, but also what will be in the future. So, there’s an element of futureproofing in our design and that informs our thinking when we come to these projects. There is no one-size-fits-all.”

Let’s take Southampton, I say, your first development. Are your flats targeted at young professionals or families? What is the demographic? For the most part, says Ivory, they are the young professional or the millennial renter, as they’re often called, with ages between early 20s and mid-30s. “That is certainly true of our Southampton project which is almost 80% leased, although we only opened the doors four weeks ago. When I speak to the leasing staff down there, the typical profile is certainly that 20s to early 30s young professional, either single or sharer.”

“But what we’ve learned – and this is informed by our US experience where we’ve been owning and managing these apartment communities for nearly 30 years – is that no amount of demographic analysis, market reports or forward planning and thinking can tell you exactly who that resident is going to be on the day you open the doors. You’re just as likely to get the retired couple from Devon who’ve decided to move back into the city because they’re downsizing, and they’ve freed up the equity in their family home, or the divorced 55-year-old dad who needs a place to stay.”

Buildings change, cities change, areas change, demographics change and fashion changes

“So when we design our schemes, we try to make them as flexible as possible and as appealing to as wide a demographic as possible. I think the error some operators take is they pursue, too doggedly or narrowly, a single type of resident. Buildings change, cities change, areas change, demographics change and fashion changes. Things which were fashionable or popular when they were conceived may no longer be so in five years’ time. So we try to give some thought to the design and flexibility of our space to appeal to the widest audience possible. Because the reality is, when you open those doors, you genuinely don’t know who’s going to walk through them and lease your properties. You start out with an idea and if you’re lucky, that business plan holds true. But it’s important to remain flexible.”

These people who have come to you, I say, is it because you’re offering them exactly what they want, or is it because they are people who would rather own their own house, but just happen to have no alternative? “I think that’s a great question. Fundamentally – and remember, we are in the apartment lettings business – we believe that everybody wants to own. Whether you’re North American, whether you’re British, whether you believe an Englishman’s home is his castle or you subscribe to the American dream of homeownership, everybody wants to own. It’s just that that is either not appropriate for that stage in your life, maybe because you want job mobility and flexibility and things like that, and it’s more of a lifestyle choice, or it is simply not an economic reality. Maybe you are unable to save up for the deposit because the capital value is so high.”

“In answer to your question, people are coming to our buildings and renting our apartments because there is a fundamental supply-demand imbalance in the UK. There is not enough housing and they are looking for shelter. We like to think that once they get there, the lightbulb goes on and they go, ‘ah, this is different. I’m not dealing with a lettings agent, I’m dealing directly with the landlord. I understand that if something breaks, that landlord will fix it within twenty-four hours. This does not have the look and feel of my last apartment which may have been owned by an absentee landlord’, or something like that. So I think it’s about education. Winning hearts and minds takes time. That doesn’t happen overnight. But fundamentally, people need places to live and if you get the basics right, which is being in the right location, being at a price-point that’s affordable, and looking after that building, you will have a stabilised, popular building.”

Is the business model of Atlas Residential to sell on the blocks it is building to somebody else? “We haven’t answered that question yet. It’s very likely that we will certainly sell certain assets to other institutional or investors seeking a stabilised yield. That’s highly likely. But again, based on our US experience, we’re no stranger to aggregating a portfolio so that we can enjoy that stable income. One of the reasons why we like the asset class is there are so many options available to you once you reach that kind of scale. We might refinance, we might do an IPO, we might sell off portfolios or we might sell the entire portfolio. The answer is I don’t know. We haven’t got to that stage yet. The business plan now is to aggregate that portfolio so that we can create that kind of optionality.”

One of the big issues facing the build-to-rent sector is that the yields you can get are quite low. To make your numbers work, surely you have to realise some capital value at a point within the foreseeable future? “I disagree with that. Fundamentally, we think that these apartments or homes – it doesn’t have to be apartments, the model works in the single family home asset class as well – are more valuable with people in them paying rent than they are vacant for sale. And that, to answer your original question, is probably where this becomes quite pioneering. Because that recalibration, or shifting of the mindset, to suggest that actually the income is more valuable than the vacant possession value is a fundamental sea change in how these assets are perceived. That, to your point, is where we perhaps are brave and are pushing this business in new directions.”

What kind of yield then is Atlas looking to realise from its pioneering projects? Suppose you filled your property in Southampton, with 100% occupancy, what sort of yield would you be getting? “Right now, we are investing only in the regions, outside London, as I mentioned, in places like Birmingham and Manchester. We use leverage too so, using a levered return, we fully expect to be getting 7.5% cash-on-cash yields post-tax once these assets are stabilised. That’s a really important point because I don’t know where anyone is getting a return that is better than that on a risk-adjusted basis. Remember, we’re talking about a very defensive, counter-cyclical asset class that fundamentally is providing a basic human requirement, housing. We are delivering it into a market that is fundamentally undersupplied. As long as we’re in the right location and we manage these buildings correctly, we think that is a great rate of return for such a risk-adjusted asset class.”

That kind of yield certainly looks more interesting at a time when the traditional long lease upward only office model, for example, is on the way out. “Well, as you’ve seen via all the disruption that’s happening in that serviced office space, those 25 year leases are becoming extremely rare now. And in terms of the length of those leases, whilst they are clearly not the same as a residential AST, they are taking on similar kinds of characteristics in terms of multi-let, reduction in lease length and things like that, and the granularity of those underlying leases too.”

An obvious question then, I say, is if build-to-rent is such an attractive thing, why aren’t more people doing it? “I think it takes time. When you are disrupting or creating any new asset class – and obviously, I use the word ‘new’ in the context of our earlier conversation about there being a build-to-rent industry as far ago as the 1970s – there is a lack of understanding and education. In fact, from a low base, the sector has grown extremely quickly. I think the latest statistics indicate there is something approaching 100,000 build-to-rent properties either built, in construction or in the planning pipeline. And that’s, for the most part, all come through in the last five years. I think that the industry has moved pretty quickly considering its low base.”

When you are disrupting or creating any new asset class, there is a lack of understanding and education

“I think the reticence or sniffiness from the institutional commercial world in the way it regarded residential, that mind shift has occurred in a comparatively short period of time. I can remember when I started in this business, specifically build-to-rent, I would spend the first 20 minutes of every meeting trying to explain to people what I did for a living. I’m fortunate enough I don’t have to do that now because it’s such an – well, I won’t necessarily say accepted – an increasingly well-known asset class.”

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