BTR and the ESG Agenda
In 2020, Standard and Poor’s 500 Index recorded that 80% of the companies listed report their performance on ESG objectives; no doubt that figure has increased in the last two years. The property and construction industry has a particular need to demonstrate their ESG credentials, given that heating and powering buildings currently makes up 40% of the UK’s total energy use, around 14% of which comes from the 28 million homes in the UK. The Housing Quality Mark standard, GRESB benchmarking and WiredScore prove that sustainable investing is already an important consideration, and no doubt one which will accelerate.
A priority for institutional investors
Prior to the pandemic, institutional investment in UK real estate was focused on commercial property. But the world has changed, and residential property is demonstrably the more robust asset class, with yields consistently out-stripping those of the commercial sector. LRG has seen significantly increased interest in BTR by institutional investors, including from owners of either commercial or retail properties (which may be converted into residential under Permitted Development Rights) and simultaneously, retail property investors and operators such as John Lewis.
The John Lewis Partnership has recently revealed the first three locations where it plans to debut its ambitious plans for the BTR market. These include buildings over Waitrose shops in Bromley and West Ealing in Greater London and a purpose-built building on a vacant John Lewis warehouse in Reading.
In the case of retailers such as John Lewis, the move into the private rented sector (PRS) is prompted by social responsibility - the S of ESG - in that it addresses both the housing crisis and the ‘perfect storm’ which continues to batter the high street.
John Lewis plans to address inadequacies in the PRS by offering, ‘the trust, quality and service that people expect from John Lewis and potentially offering discounted rents to the Partnership's 80,000-strong workforce’. Residents of the 20 sites already identified by John Lewis will have options for short and long-term tenures and can choose to have the homes furnished by John Lewis. High priorities for the retailer are creating a sense of community through incorporating shared spaces and facilities such as roof gardens and fitness studios, and exploring how such schemes can play a role in the wider community.
Simultaneously, increased professionalism in the private rented sector (accelerated by the Renters Reform Bill) marks a more socially responsible approach to lettings, one which is far removed from the days of the ‘dodgy landlord’ (although, it is quite righty noted in the text accompanying the Bill, unscrupulous landlords have only ever accounted for a small percentage of the sector).
BTR has already shown itself capable of improving the health and wellbeing of residents - from encouraging active travel and health and wellbeing classes and workshops, to allowing pets in rented properties.
With large landowners such as the Church Commissioners increasingly focusing their investment strategy in the residential sector, this trend is set to continue.
And BTR, specifically BTR suburban communities, provides the vehicle by which the ultimately socially responsible landlord can fulfil its ESG goals: family homes in sustainable neighbourhoods, a strong sense of community, a comprehensive and responsive approach to property maintenance, and long-term tenancies result in a significantly improved tenant service.
With up to 20% of gross domestic product globally at risk from carbon emissions and institutional investors committed to meeting net zero targets, the E of ESG has shifted from an abstract notion to a business opportunity. 2018 figures show that 75% of millennials are eco conscious to the extent that they will change their consumer habits to support brands that are demonstrably eco-friendly, and the pandemic has heightened this conscious bias.
And so again, it is unsurprising that the BTR sector is at the forefront of innovation. In BTR suburban communities, with the potential for combined heat plants alongside other opportunities for renewable energy and sustainable features, environmentally responsible solutions can be incorporated particularly effectively as a result of scale and potential for efficiencies. Furthermore, the main reason why homeowners resist renewable energy features such as air source heat pumps is often concerns about maintenance – availability of both parts and technicians. Where snagging, maintenance and emergency work is the responsibility of experienced property managers, this is no longer a reason to forgo the more sustainable option.
Similarly, homeowners have tended to prefer brick, block and tile because these established building materials have proved consistently reliable and maintain values. But tenants’ attitudes differ: if a timber-frame Passivhaus offers both environmental benefits and lower heating bills, it is unequivocally a better alternative.
Sustainable construction, already a feature of many traditional BTR schemes in the form of modular build, will inevitably become a feature of BTR suburban communities, not only because of its environmental benefits but its speed, flexibility and cost efficiency.
Biodiversity is also of increasing importance. Following the enactment of the Environment Act in November 2021, biodiversity net gain will become a priority within the design of new communities. Sustainable features which cannot be achieved by private landlords buying a single unit (or even corporate landlords taking on change of use under Permitted Development Rights) can, and certainly will, be highly prioritised in the BTR suburban communities funded by institutional investors. Governance
Governance in property lettings has a broad scope: from the management of individual BTR schemes, to the principles and practices of the developer or investor and the means by which both interact with external stakeholders, including the wider community. The schemes which have a dedicated management and/or a concierge service committed to delivering excellence in resident satisfaction are already providing good governance.
Financial and accounting transparency, frequently delivered through online payments systems is also important to effective governance. An example of this is LRG’s recent collaboration with The Depositary, a new reporting module which provides tenancy conclusion data. The end-of-tenancy deposit return process can sometimes be fractious, as it exposes natural conflicts of interest between the tenant and the landlord. Since trialling The Depositary, we have found that dispute levels have been reduced, but also that turnaround times to release deposits have become quicker.
As the wide-ranging benefits of The Depositary show, social, environmental and governmental goals are not a challenge, but an opportunity. This is a view which, I’m pleased to say, we share with our investor clients. These goals have certainly guided our work in the traditional BTR sector and we see many considerable additional opportunities as we move into delivering and managing BTR suburban communities. An
An industry initiative
In 2021, the British Property Federation (BPF) established a Residential ESG Working Group with the objective of identifying a clear and suitable way forward for measuring and comparing ESG performance.
The working group mapped the existing ESG landscape and produced a report ESG Guidance for the Institutional PRS which found a proliferation of tools at the disposal of residential investors, developers, and managers - industry benchmarks, certifications and accreditations and frameworks – which are distilled into digestible summaries and categorised via a ‘suitability matrix’. The working group concluded that a uniform ESG solution for Build to Rent required a deeper understanding of both the approaches being taken and the challenges that the sector faces. The BPF’s Residential ESG Sentiment and Experience Survey aims to do exactly this, and to show a market opportunity for a bespoke Build to Rent ESG solution.