How does build-for-sale differ from build-to-rent and what can developers learn from each other?

‘There are inherent differences between build-for-sale (BFS) and build-to-rent (BTR). When building homes for sale, the modus operandi for the developer is to recover costs, pay back any development finance, and allow invested parties to make returns on their equity. Nothing wrong with that, but there isn’t an inherent need to look to the future. Whether the build or its finishings last 40 years and operate efficiently are considerations unlikely to factor into one’s thinking, as the developer’s responsibility for said asset ceases when the last unit is sold.

Defects aside, any costs associated with the upkeep of a property, whether that be through capital projects or maintenance charges, are no longer the developer’s responsibility – they are henceforth borne by the homeowner. In BTR, however, the developer holds their asset long-term, with the costs of the build being recovered, alongside a profit margin, through the annual rent  paid by residents. In building something that’s designed to make returns long into the future, costs associated with upkeep are borne by the developer. Therefore, it is in their best interest to ensure that the build and its finishes stand the test of time and reduce gross to net value.

Both models have different financing criteria and their timelines, levels of return, and risks reflect that. Are there lessons BFS developers can learn from their BTR cousins?

At POD, we manage both for sale and for rent schemes. Resulting customer journeys highlight key differences in the two, with legislation, owner structure and the ultimate power to influence impacting the experience for the consumer.

The most obvious difference can be seen in build quality. In BTR, finishes must last to ensure capital outlay is minimised for the landlord. This might result in higher initial outlays, but selecting resilient products that minimise maintenance costs from the outset will increase annual profits.

One could argue that in BFS, the developer is unlikely to choose materials based on longevity, given the onus to replace becomes a responsibility of the homeowners. This means they can value engineer their project to maximise profits, often at the expense of brand reputation and long-term operating efficiency.

We would argue that brand reputation hasn’t aways been a priority for BFS developers. However, with review platforms and social media becoming more prevalent, and consumers’ savviness is impacting their purchasing decisions, can developers now afford to carry less favourable reputations?

Legislation also plays an important role when comparing BTR to BFS. Both asset classes place the accountability for upkeep with the owner but in BFS, and in particular multi-family buildings (i.e., blocks of flats), the costs are passed on to the homeowner and charged for separately. This creates a dynamic whereby a front-end service giver, usually an independent managing agent, enforces cost recovery; in so doing, putting more scrutiny on ongoing costs. Given these costs will also not affect the asset owners’ exit strategy and immediate sale prices, where is the impetus to add value?

When a building is handed over to a resident management company (RMC), there is no guarantee they will act in the best interests of the building. Experience has shown us that directors are often motivated to keep running costs at a minimum, with service charges being seen as an additional overhead, rather than an investment. This does not support the long-term upkeep of a development.

In BTR, the same obligations to upkeep apply, but are paid for by the owner with the ultimate cost being recovered from the consumer through their rent, so they never see a separate demand for payment. Increased investment in the building can be offset through rents, given the quality of the asset has a direct impact on rental values. In this instance, it’s in the developer’s best interest to maintain the property.

This decision-making process is in the hands of a corporate (and arguably professional) outfit who can make the decision quickly, without consultation to the end consumer and with no immediate financial impact either, given the costs should already have been factored in to the ongoing Opex and Capex plans. In BFS, such decisions typically require consultation with end consumers, and can be subject to legislative communication compliance (Section 20 of the L&T Act) which takes time to complete. Ultimately, in BTR conversations focus on what drives income, whilst with BFS the issue is one of expenditure, and an entirely different dynamic ensues.

Interestingly, expectations of renters moving from BTR into BFS are seldom matched by the reality. When moving into your new BTR home, you’ll probably find many conventional pain points removed, with access to furniture, utility packages, WiFi and value-added services available and included in the price, removing the need to arrange these in advance of move-in and often with an onsite team to assist with onboarding, if required.

In BFS, developers leave the homeowner to make their own utility arrangements. Whilst that’s arguably the nature of homeownership, this can hinder a seamless customer journey. Given modern technology and digital platforms, we believe this can be improved, with several digital platforms looking to provide a one-stop shop for onboarding processes that, if provided by a developer, would make this journey more enjoyable.

Will BFS make changes to the way developers think? We hope so. We are seeing more developers understand the need for improving brand reputation and creating properties that last. Investments in defect management, quality control, and better communication are being made, with many looking to schemes such as the House Builders Federation Awards for recognition and industry awareness. 

Partnering with a management company that understands these nuances and can enhance the customer journey and ensure quality reaps rewards. At POD, we offer design for management consultancy services to provide developers with vital insights that inspire long-term returns and improved customer satisfaction. 

If you would like more details on how we can help, get in touch with our team of experts.