Q&A with React News
Jessica Middleton-Pugh of React News recently ran a Q&A with Packaged Living and Fiera Real Estate on their latest venture as investors ‘cry out’ for suburban BTR.
Originally published by React News
Packaged Living launched two years ago with the backing of Fiera Real Estate, led by a duo formerly of Grainger to join the charge of developer operators moving into the build-to-rent market.
With schemes now under way in several UK cities, and a portfolio reaching 2,000 homes, the business and its funding partner has looked ahead in order to this time be one of the first to capitalise on the next residential market trend, and this week announced its move into suburban family rental homes.
Working alongside housebuilders, and bringing on board former Atlas Residential director Jonathon Ivory, the new division of Packaged Living is prioritising scale and a quality service offering, to meet the needs of the mass of the UK population who remain in low-quality homes.
React News spoke to Packaged Living co-founder Ed Ellerington, new recruit Jonathon Ivory, and chief executive of Fiera Real Estate, Alex Price, on bringing institutional backing to the suburban rental market.
Why now, with momentum still building around Packaged Living’s typical BTR portfolio?
EE: When we launched Packaged Living in 2018 our initial target was to hit 3,000 multifamily homes nationwide in the first three years. And we’ve been true to our word; we’re currently around 2,000 either on site, in planning, or in acquisition, which is £500m GDV and we’ve been successful in partnering with others – with Invesco, with Homes England, and of course we always have the backing of Fiera.
From inception we have always had an eye on the single family market and knew that was certainly something we wanted to get into. We’ve seen that sector become more and more attractive, and it’s a pretty untapped sector. Whilst there are others in the market it’s still pretty immature. And so, certainly, over the last 12, months, given the relationships we have with housebuilders, and given where we see the investment market moving to, it was a natural time to launch the single family housing platform and bring Jon onboard.
What was the motivation behind moving from city centre build-to-rent and into the suburbs?
JI: It’s a well-rehearsed argument that we have had population growth, combined with an undersupply of housing which has resulted in house price inflation, and ultimately, this has led to reduced homeownership. In English, that means increased demand for rental houses. However, the affordability issue isn’t just confined to city centres. According to the government data, the fastest growing demographic within the private rented sector is actually suburban dwelling 35-to-44 year olds, many of whom will have children. So these aspiring homeowners, often referred to as generation rent, are likely to have missed the opportunity to get onto the housing ladder, due to the financial dislocation caused by the global financial crisis.
We believe that as responsible investors and stakeholders in society, it’s incumbent on us to seize this societal opportunity to deliver family friendly, professionally managed single family homes to an ever growing percentage of the population for whom homeownership is simply no longer an option.
Why has Fiera decided to back this move into suburban build-to-rent?
AP: Within real estate, we manage about £4bn worth of assets in North America, and in the UK it’s about £1bn. When Fiera looked at this opportunity, we said to ourselves: “residential, which was an ‘alternative’ asset, is going to become mainstream, as much as retail may become an alternative asset type”. As part of that journey we need to increase our exposure, both through development which we’re doing in the multifamily space, and through owning assets in the residential space, and that means single family as well. So today we’ve got about £100m of equity invested into the residential sector, from our own funds, and about £150m further in a joint venture with third parties, Invesco, Homes England, etc.
We think this needs to grow substantially, so our target is to try to deploy about another £100m into the residential sector over the next two years, with that money predominantly coming from our most recent funds that have been launched. Single family is a relatively untapped market that’s crying out for investment to institutionalise it, and investors are crying out for opportunities to access the residential market. Residential provides a great inflation linked income or cash flow to investors…by expanding into single family we’re able now to address the need for houses.
How will the Packaged Living relationship with housebuilders work?
EE: When you look at the business there are two elements to it. On the multifamily side we’re very much buying land and delivering through our own development capabilities. However, on the single family housing side it’s actually very difficult to compete with housebuilders; they are highly efficient and competent at what they do. They’ve got very clear processes and they can build individual houses in a much more efficient way than a contractor can. So having known that and given the relationships we’ve got, we’ve simply tapped into that market, to fund the delivery of homes and providing the operational wrapper. We’re not trying to reinvent the wheel with housebuilders, we’re not trying to tell them how to build homes.
What’s the goal with the new platform?
EE: For us really it’s about creating scale with key partnerships and then ultimately being able to operate, with a service-based offering which is not about swimming pools or amazing facilities on the site, but delivering the service people really need. 95% of the PRS market in the UK consists of landlords with five or less properties and in single family housing this percentage is even higher. We aim to professionalise this element of the sector connecting with rather than competing against existing community facilities.
So if we’re wanting to deliver well-run, well-built and then well-operated schemes, housebuilder partnerships are critical. At the moment we’ve got two or three key relationships, and we’re hoping to grow to five or six.
What do the ideal schemes or locations look like?
JI: It’s very much a national platform. The sweet spot is no less than 50 homes and up to 200 homes per location. The key ingredients are proximity to transportation, local employment, retail leisure, schools and hospitals. All the reasons why there’s a requirement for homes for sale are applicable to homes for rent. That being said, we’re trying not to be as prescriptive as possible in order to flex our model to work with our partners.
Are the homes aimed at Packaged Living tenants who are now ready to move out of the city?
JI: Clearly it’s broader than just the millennial cohort. It’s pretty true to say that for the last decade, the real estate investment community has, for the most part, focused on those city dwelling professionals, be they millennials or otherwise. And by that I mean multifamily, so when market commentators reference things like the 170,000 homes that are either completed, in construction on planning, what they’re largely talking about are apartments.
So, during that investment period, those residents have been getting married or having children, and are moving to the suburbs. And that’s no different to what every generation has done before them. The big difference this time is this particular cohort are now increasingly accustomed to the high levels of customer service that they’ve experienced in the build-to-rent sector. The professionalisation, or institutionalisation, of single family rental is as logical a progression on that accommodation journey for the residents moving to it from multifamily, as it is for graduates leaving purpose built student accommodation to live in an urban build-to-rent community.
So if not just for millennials, who else is your target tenant?
EE: It’s probably fair to say with this kind of housing stock, these are mid-range housing for key workers, we’re not trying to create executives homes in gated communities, that’s not what we want to do. Generally Packaged Living’s apartments have been targeting that average salary customer and our single family homes will be no different. And in our experience, the age-range is huge, we’re not trying to simply target the 20 to 25 year old, we’re just trying to target people who really want to live in well built homes who want good service.
How have the ongoing challenges faced by Coronavirus and lockdown this year shaped your thinking as a funder?
AP: The affordability gap in housing has grown in the course of the last couple of years, with house prices today at a record high at a time when we can see what’s happening to our economy, as the economic impact of coronavirus is fully exposed with the Government’s programmes of support ending. We want to use the lower required return that our investors need for secure cash flows, and to use that to deliver truly affordable housing and rents. We know there’s also a lot of families out there who may not be able to afford to buy a house, because of that price inflation, but they still need somewhere to live. From our point of view we think that addressing the mainstream market, which is family housing, is a huge opportunity, and we need to try to help deliver tangible social impact by providing shelter.
Will this be followed by moves into other parts of the residential market still crying out for ‘institutionalisation’, such as affordable and retirement living?
AP: From our point of view we think that addressing the mainstream market, which is family housing, is a big enough opportunity, and has enough for us to go at, that we have no plans to go into the specialist sectors. Further down the line that’s not to say we won’t, but we’ve got a massive opportunity now, a great big elephant that we need to try to deliver social impact in. If after that there’s other things, we can always look elsewhere.