Q+A: New suburban BTR partnership banks on green credentials

Nov 25, 2021 | News

Jonathon Ivory, Manaing Director of Packaged Living’s Single Family Housing platform, recently spoke to React News alongside George Fraser-Harding of Aviva Investors about their new partnership.

Originally published by React News.

As other institutional investors have piled into the UK’s build-to-rent market, Aviva Investors has stayed on the sidelines.

But that is about to change. Aviva Investors is partnering with Packaged Living to launch a new platform, targeting an initial £200m portfolio and with a further pipeline of £500m expected to be added in the coming months.

Rather than enter the tried and tested multi-family sector, the fund manager is targeting the less established single-family home market.

In an interview with React News, George Fraser-Harding, fund manager at Aviva Investors, and Jonathon Ivory, managing director of Packaged Living, explain the thinking behind the move, how they believe the new partnership will stand out for its focus on sustainability and why they are targeting larger sites.

How did the partnership come about?

George Fraser-Harding: We haven’t focused on the residential space historically, but over the past year we have spent a lot of time with our research team to pinpoint where there might be a value-based opportunity to enter the sector.

What really stood out to us was single-family housing. It stands apart in the market as it has not been institutionalised in the UK and there’s a real need for it. As house prices have become more unaffordable, supply and demand dynamics are such that we think that there’s a real case for entering the sector.

We looked at whether we create our own team or whether we partner with someone else and the discussions came up with Packaged Living. Jonathan and his colleagues really impressed. The management team there came very highly recommended and culturally, we glued together well.

Aviva Investors hasn’t historically invested in BTR. What has changed?

GF-H: We have a new team in place and we looked at it afresh. We looked at other countries such as Germany and the US where the single-family housing sector has matured over the last 15 years and has developed into a core low-risk product. We also spent a lot of time looking at the fundamentals in the UK, and it is a sector that we see a lot more value in than multi-family.

What makes the new platform different?

GF-H: What really differentiates what we’re doing is the focus on sustainability. It sounds quite a small thing, but by going all electric, rather than installing gas boilers, we’re making a big change to the credentials of the developments. We’ve already signed on 200 homes and we’ve got close to 1,000 new homes in exclusivity so just small changes like the EPC rate going to A and moving to all electric can make a big, positive, environmental impact.

Jonathan Ivory: We’ve taken bold decisions to remove fossil fuels from these homes. To name just a few of the net zero initiatives, we’re installing air source heat pumps, photovoltaics and EV charging stations to encourage the use of electric cars. We’re already starting to see the benefits of that decision-making, vis-a-vis things like the green interest rates we’re seeing on our development loans.

I think that while many avoid that type of upfront expenditure, this is a long-term buy and hold strategy for us. We’re taking steps now that we believe will lock in long-term value.

How much are you looking to invest? Is the £500m pipeline an upper limit?

GF-H: £500m isn’t a limit. That’s looking at the expected pipeline that we are projecting for next year. This is a strategy that we’re really committed to. We’ve got large amounts of capital that can potentially go into this. So as long as we continue to see the opportunity, and as long as we continue to see the sites and build on the relationships that we have with housebuilders, then we’ll continue to invest.

What size of sites will you be looking at?

JI: In terms of number of units, we have a notional floor of 50 homes per community but there isn’t really an upper limit. We recently exchanged on a 200-home community and we’re in exclusivity on a 400-home community.

“Wrongly, I think, there’s a perception that the model really only works at around 100 homes”

JONATHAN IVORY, PACKAGED LIVING

Most single family home schemes have historically skewed on the downside. Wrongly, I think, there’s a perception that the model really only works at around 100 homes, but that’s definitely not true. It’s just that historically business models have tended to focus on mopping up the tail ends of sites, whereas our strategy is to have a true partnership.

We’re working with housebuilders at the pre-planning stage to support land acquisition strategies, and then informing the design and specification of the homes. And in return, we’re securing significant allocations on sites.

How do the economics compare to traditional multi-family housing?

JI: First and foremost, single-family housing enjoys the same robust, counter cyclical, inflation matching, income returns as multi-family housing. However, it benefits from more efficient operating expenses due to the lack of common area maintenance and extensive community space upkeep.

But the big win comes from the longer leases and lower churn inherent in the sector. If multi-family residents are more transient because the demographic skews young professionals who tend to move around. Then, single family housing is characterised by an older demographic (read 35 – 45+ years old) who tend to be more encumbered by marriage and children with a focus on security of tenure and quality schooling. 

Longer leases is shorthand for lower churn which equals less operating expense. Less operating expense means improved NOI. Improved NOI leads to higher valuation. Finally, if our OpEx is more efficient then our rents can be more affordable, having affordable rents allows us to a larger share of the local market.