By any measure, the US Multifamily market is huge. According to the 2017 American Community Survey of the 120,062,818 households in America, about 34% (43.4 m) are rented and house approximately 108,846,495 people. To put that in context, that means that the number of people living in rented accommodation is more than 1.6 times greater than the entire population of the UK. The US multifamily market is often referenced in the UK as a benchmark for the BTR sector in the UK. Whilst there is no doubt that lessons can be learnt, the reality is that the dynamics are so different that it cannot be the blueprint for the future of the UK BTR market.
The reasons multifamily can’t be the UK blueprint
There are 50 cities in the US with a population greater than 1 million. In the UK, other than London, only Birmingham has a population over 1 million. This creates a completely different dynamic; for example there are far more opportunities for employment in multiple large cities. According to latest US Census statistics, circa 14% of the population (40 m people) moved at least once in the year 2018. In the UK, the population is much less transient.
To state the obvious; the US has a far larger land mass than the UK. The size of the country means that land parcels have developed differently. The land in the UK is far more constrained and ownership often fragmented. To commence a development, a site may well need to be assembled in order to create a suitably large land parcel. Perhaps other than a few major cities, in the US there is an abundance of land.
The other obvious difference is that the US is far more pro-development. In most scenarios, consent to develop a new building can be achieved in under six months (the median period for a construction permit is 60 days). Conversely, the average time taken to achieve a planning consent in London is 497 days, with the longest recent application recorded taking 1,612 days.
Perhaps surprisingly, home ownership levels in both countries are relatively similar. The US is slightly higher; 64.2% of the population compared to 62.9% of the population in the UK. Home ownership rates in both countries have declined over the past decade, however, whilst affordability is a driver for this in the US, it is nowhere near as big an influence as it is in the UK. In 2017 the typical selling price for a single family home was 4.2 times greater than the median household income (according to the state of the Nation’s Housing report). Whilst that ratio has increased significantly since 2011, it is still relatively affordable in comparison to the UK’s average house price at 7.7 times average income (London is 13.24).
These market dynamics create two completely different environments for operators in the multifamily/BTR space. In the US there are a significant number of large cities with a far more fluid market. Deep pools of employment opportunities mean workers are likely to migrate between cities for better employment prospects. This creates a market where operators need to create a product differentiated by service and amenity offering. They are able to access the market relatively quickly to meet changing demand as industries, economies and dynamics change.s
Build to Rent in the UK
The UK, however, is a very different scenario. Land is difficult to acquire and planning consent even more elusive. Proportionately the renting population is broadly the same size, however, such renters are far less likely to move outside of London to other parts of the county. Whilst homeownership levels are declining, in the UK this is driven first and foremost by affordability rather than a desire not to commit to London long term through fear of having to ‘up-sticks’ and move to another part of the country for work. Therefore, cost is likely to be a far more important driver to tenants than any other factor including amenity and services. Apart from a few smashed avocado brunch-eating millennials, the vast majority will simply look for low cost, professionally managed, no frills accommodation.
Whilst there currently may be a premium achieved by “out servicing” your closest competitor, this will ultimately be a race to the bottom as these premiums become eroded by the volume of stock available increasing over time. There is no doubt that there will be a market for premium grade BTR product. However, the largest and most obvious space for the BTR industry to grow rapidly is to provide that good quality, professionally managed, no frills accommodation which sits above affordable housing and below the product provided by buy-to-let landlords. The challenge for the industry will be to drive returns by procuring at a lower cost base in order to improve financial performance, rather than doing this through achieving a premium from services.
I have no doubt the government will need to undertake some changes to SDLT and general taxation in order to stimulate new housing supply – particularly in Inner London where new construction starts have declined rapidly. In the past international purchasers and commercial underwriters have stepped into this void. This source of buyer may no longer be so prevalent. Hence in order to fill the gap, housebuilders, developers and BTR operators should consider how best to satisfy the demands of a very specific UK market. My tip would be not to assume that a “copy and paste” approach will yield the most successful outcome.
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