Service and finance: the building blocks of US private-rented success


Service and finance: the building blocks of US private-rented success

News : Property Week

Once upon a time, when Victoria was Queen, UK property developers used to create good-quality, purpose-built blocks of apartments for rental use. These buildings are still standing today, and give London W1 and W2 much of its character and charm. Those original buildings had porters, elevator operators and cleaners – in short, a service.

Although they have been sold off as individual units to private owners, they are still appreciated for their spacious, “user-friendly” flats, high ceilings and portered lobbies. This concept was brought to America, and the skylines of New York and Chicago are still dotted with rental apartments or co- operative buildings of an 1890-1940 vintage.

The UK and US cities had a condominium boom – the sale of flats to individual owners – in the late 1970s and early 1980s, and then again from 2003 to 2007. However, during that time US developers and investors continued to either build or buy large unbroken blocks for rental investment, rather than sell them to “mom and pops” to do the same. Why?

The operation of an apartment building is much more efficient than an individual flat. The income stream from a diversity of sources (flats) is much more secure and easier to finance. One example of this is the size of the CMBS (commercial mortgage-backed securities) markets in the US – which is underpinned by multi-family loans – compared with Europe, and the fact that the US multi-family or private-rented sector was the last to enter the 2008 recession and first out. A landlord or manager can deliver better services and amenities to residents, which is value for money.

US investors — institutions and “mom and pops” – realised long ago that it is better to take a fractional ownership in a larger property scheme through a partnership interest or a REIT share, often investing their IRAs (individual retirement account) – equivalent to UK SIPPs (self-invested personal pensions) – rather than owning and caring for an individual property directly.

The US government encourages this investment by making it tax advantageous for the public to invest in good-quality rental housing for keyworkers, rather than doling out section 106 subsidies, as is the case in the UK — which, in effect, makes housing less affordable and ordinary people more dependent on government subsidies.

When a landlord delivers a purpose-built block with amenities, a valuable sense of community is created.

More importantly, the rental apartment sector has created a dynamic and mobile workforce that has contributed in no small part to the US economic success story. Young people exiting college or university are not burdened with “getting on the property ladder”, which shackles them to a mortgage and an illiquid asset, when they should be focused on upward career mobility, which often involves physical mobility.

Indeed, the US and UK residential property markets are not so different: the ratios of owner-occupancy to rental are virtually identical (65:35).

The difference is that UK housebuilders, investors and developers break up the rental stock and create inefficiencies.

Of course, there is no perceived value for money when renting an individual flat with no services. However, that perception drastically changes in an unbroken, purpose-built block with onsite managers and renting agents, maintenance staff, a fitness centre, common areas, creche, storage, laundry or whatever amenities the local market demands.

When a landlord delivers these, a sense of community is created, which is valuable indeed. Indeed brands are built with a mobile workforce opting for the same multi-family operators wherever possible, as residents can often develop a positive relationship with the property operators.

In the US, one finds signs that anoint buildings “apartment homes” or “rental communities”. The Victorians called their blocks “mansions”. What the UK needs to remember is that there are no landlord and tenants — only homes with residents.

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