The MD of Atlas Residential’s London office discusses differences and similarities between the UK and US markets.
When Atlas Residential, which has a portfolio of more than 20,000 ‘multi-family’ units across 13 US states, decided to push into the UK market in 2012, it turned to Jonathon Ivory, who previously ran the London office of a New York investment bank that counted Atlas among its clients.
Now, Atlas has 850 units completed or under construction in the UK across sites in Southampton, Birmingham and Salford, and more than £160m in funding commitments.
Ivory sits down with Property Week to talk about Atlas’s growth plan, why BTR is a “nickel-and-dime” business and why in 10 years’ time the “amenity arms race” seen in the US could spread to the UK.
How much adjustment has Atlas made for the UK market?
The underlying premise is we own what we manage and manage what we own, and the management piece is very much in our DNA, which is less typical in the UK. Our stock will be managed along the North American multi-family operational lines, albeit having been nuanced for the UK market. We’ve been thinking for the past five years about what bits of our US model will travel successfully to the UK, and then filling those gaps.
So how are you different to firms established in the UK?
There’s no replacement for experience. We’ve been managing these buildings for 20-plus years. It’s a real nickel-and-dime business, and by that I mean there’s a lot of moving parts, and being able to be efficient and control costs at the property level pays dividends. So it goes back to being a vertically integrated investor-operator and being able to see the whole spectrum of the project – it aligns us better with our capital partners.
What about from an operational perspective?
It does sound a bit woolly when you say things like customer service, but when we say it we do genuinely mean it. Fundamentally the thing that does travel is good service. One of the things we got pushback on from people in the industry was that they thought the UK consumer wouldn’t pay for it, or wouldn’t want to be treated well, and we just flatly refused that. You want good service. You will pay for good service. The only question is how much?
Some people in the UK market are wary of what they perceive as an amenity-heavy model coming from the US. What’s your outlook?
There’s no substitute for being in the right location, having the right building, maintaining the building and looking after your residents. You don’t need a swimming pool on the roof or a running deck going around your building to attract and retain residents. That’s our business model; that’s what the American market has sussed out, and I suspect what our UK competitors have missed. I think they are very anxious to spend a lot of money on things like branding and arguably over-amenitising their buildings in the absence of experience and knowledge of the asset class. I think it’s an overcompensation.
Why are so many buildings in the States heavy on amenities?
The amenities arms race in downtown metro areas is because the asset class is quite saturated. In order for these buildings to differentiate themselves, they have to do something different, whether it’s an indoor cinema or a dog-walking service. We don’t have that problem in the UK. I’m comforted by that, but if we fast-forward 10 years we’ll start to see it become more competitive and people will have to differentiate themselves either through renovation programmes or by adding in those amenities.
How different will the market look in the UK after that happens?
Whereas in the UK we’re developing and building, in the US we buy standing stock, 20 or 30 years old. If they’re tired, we will take them offline, renovate them and re-introduce them, and that’s how you stay competitive, by modernising and upgrading to keep up with the market. That will happen here, just not for some time. You’ll start to see other groups – probably some US REITs and globally other capital sources – switch from developing, or those that have been too cautious to develop will look to acquire standing stock.
How have you had to adapt the US model to the UK market?
One example: we do have in-house lettings agents but we also work with local lettings agents [which they typically don’t in the US]. We recognise we might not know everyone in the market, and we just think that’s the right thing to be doing in new markets where we’re perceived to be the disruptor coming in.
How do your UK schemes differ from Atlas’s apartments in the US?
The obvious one is that they’re smaller. It’s unusual to go into a US apartment and not have a walk-in closet. There are some things that are just strange about the US, too – even if it’s a class-A brand-new building it’s not uncommon for apartments to lack a washer-dryer. You have to rent that or bring your own, whereas in the UK I don’t think a resident would rent an apartment without it.
You have three UK schemes now. Was that where you hoped you would be when you set out in 2012?
I’d be lying to you if I said we didn’t want more, but everyone would say the same. Because it’s such a nascent industry it’s populated with challenges throughout, whether it’s planning, development, construction, the operations, nobody has done this before.
What’s the biggest barrier right now?
I think the two main challenges are construction cost inflation and the perception of yield shift between where values were last year post Brexit vote and where landowners think they are today. It’s exacerbating and arguably slowing down the delivery of these schemes. Some investment consultants are unhelpfully talking the market up and inflating the aspirations of their clients.
Are you holding off until values settle down?
We just closed a deal in Media City [in Salford], but you need to be more thoughtful and selective and not waste time on schemes that are unrealistic and will still be on the market in six months’ time.
Is there another deal in the pipeline before the end of the year?
I can’t comment on whether we’re closing another one this year, but as to the overall aspiration, internally we talk about 10,000 units here in the UK. I certainly think we will continue to invest in and develop those assets for as long as it remains appropriate to do so.
Where in the UK are you looking?
Manchester, Birmingham, Leeds, Bristol, Newcastle, Liverpool, the M4 Corridor all the way down to Cardiff, the home counties around London, the commuter belt – they’re all locations that work for us. And London is included in that. While something in Birmingham trades at a higher yield, we’d also just as readily invest in London at a lower yield, because it all blends to a number we think is acceptable. We’re not looking at Scotland right now, and we have some reservations about the mood music around rent control and things like that.
Do you enjoy working with American colleagues?
I travel quite a bit to connect with colleagues, either in Chicago or Dallas, and I enjoy working in the States. I enjoy the enthusiasm and energy they have for their jobs, and I find that quite infectious. I try to instil some of that enthusiasm and passion and work ethic into our team in the UK. It’s important to be excited about what you do.