With an ingrained focus on community, connectivity and sustainability, the build to rent (BTR) sector is helping to transform modern living habits in the UK.
With the total number of BTR homes completed, under construction or in planning at Q2 2022 up 13% from 2021 to 237,000, and with regional cities growing at double the pace of London, the sector has a huge opportunity to act as a flagbearer for the ESG agenda.
For Watkin Jones plc, a real estate developer specialising in BTR and purpose-built student accommodation, the need to provide ESG-focused residential solutions has long been an integral component of its strategy.
We recently sat down with Sarah Sergeant, CFO, and Kerry Watson, Group Company Secretary, to discuss the opportunity that ESG presents for the ongoing growth of the BTR sector.
Embedding ESG
For ESG to become embedded in an organisation’s practices, it needs a wholehearted commitment from all stakeholders. Thankfully for Sergeant, this was the case when she joined Watkin Jones in October 2021 when she quickly recognised that ESG was nothing new to the organisation.
“ESG is really just a label for harnessing everything that was already being done in the business before I joined,” said Sergeant. “Within the first few weeks, we went into launching a new strategy and it became apparent straight away that ESG was already built into our operations. There was nothing new, it had just always been there, but now it was given a name and a strategy.
“I previously worked in a much larger organisation with more employees and more units, and the management of ESG was very much top down. With Watkin Jones plc, as a smaller business, we can do it more organically. That's probably the most exciting thing for me.”
Watson stresses that it's not straightforward: “If you lump ESG in with other initiatives, it's not easy to tick the compliance box. You can't just say that, if we do these things, we're a sustainable company – it requires a lot more thought and a lot more attention. What works for one company might not necessarily be right for
another. It requires innovation and depth of thought to get there.”
“The attitudes of the younger generations are changing – they want community living, cinemas, gyms, social space – it's tapping into a social need.”
Top-down, bottom-up
The presence of ESG in boardroom strategies and investor relations meetings is undoubtedly on the rise, but the implementation of strategies at an operational level can sometimes be an issue, requiring buy-in and support from employees.
Watson believes, however, that the demand for ESG is coming from all angles: “We talk a lot about ESG and it is certainly filtering from the top downwards, but actually what we are finding is that there is a lot coming back up as well. Our people are really taking the initiative and there is a lot of creativity and innovation going on.”
Sergeant agrees: “As a business, yes we have our strategic pillars around ESG – future planet, future people and future places – and these are allocated to executive members to lead. But it's a bottom-up, top-down process that comes together to get us where we are today.”
The omnipresence of ESG across the real estate industry in the UK today can be deceiving though, and it is worth reminding ourselves that, up until very recently, that wasn’t always the case. The last few years have seen a rapid change in mindset from employees, customers and supply chain partners, as well as funders and investors keen to future-proof their investments.
“I've definitely seen a huge difference in the last the last few years,” Watson says, “including the pension funds with whom we work and who will be handling our assets for 30-40 plus years. They recognise the value of ESG and it’s great that we've got that push and pull from institutional investors and shareholders. And consumers are much more aware now as well. You've got a collective shift towards doing the right thing.”
Social value
Whilst real estate development can sometimes get bad press, it is difficult to disassociate social impact from residential development, particularly in the BTR sector. The creation of micro-communities, the use of communal space, the propensity for socialising, on-site gyms, supermarkets, cinemas and so on, all of which help to connect people, tackling loneliness and supporting wellbeing.
“It's part and parcel of the market in which we operate,” says Sergeant. “I don’t want that to sound like it's an afterthought because it’s not. But if you think about BTR, yes the market opportunity is strong, but you are also fulfilling a social need.
“Related to that is the regeneration of urban areas and, with our BTR and student developments being primarily in inner city locations, they are doing much for local communities and the urban environment around them. These schemes are so much more than just buildings to take residence in.”
Watson goes on to say: “Attitudes to housing are changing. If you look at the rest of Europe, nowhere is home ownership as big a thing as it is here in the UK. The attitudes of millennials and the younger generations are changing – they want community living, cinemas, gyms, social space. It's tapping into a social need, but also, post-pandemic, into a need for social community.
“People no longer get one job and stay in one location for all of their lives. There's a lot of mobility for career purposes. And when you move to a new city and you don't know anyone, it's scary and it's lonely. BTR can really help to address those social problems.”
ESG premium
A key challenge for developers attempting to roll out ESG strategies and bring sustainable technologies and processes into their operations is the willingness of the consumer to pay what amounts to an ESG premium for a particular site or location. Research from Hamptons’ recent Build to Rent – How Does the Premium Stack up? report shows that, in the first half of 2022, BTR investors achieved an average 10.6% more in rent than a landlord offering a similar flat nearby, up from 6.5% in 2016. Is this trend likely to continue and are residents willing to put their money where their mouth is to pay for a high ESG spec?
Watson believes so: “Our specialist accommodation management offering, Fresh, allows us to get feedback and then factor that feedback into our designs. So, we are constantly looking at increasing green spaces, incorporating rooftop terraces, trees, and so on. Sometimes it can just boil down to something as simple as what mattress you have, what desk space you have, particularly for students in our student schemes. We try to incorporate those things into our design, which residents recognise and are prepared to pay a premium for.”
“And that is the same with the communal spaces as well as the individual spaces,” says Sergeant. “With some of our student schemes, for example, we have communal rooms from which students can work or attend lectures online. They don't want to be sitting in their rooms on their own all the time. They are stunning spaces and students are prepared to pay for that benefit.”
“One of our strategic pillars is ‘future places’”, says Watson, “which relates to our focus on building places in which people are going to be living and we are going to be managing for a long time, and so we are committed to making sure they are as environmentally friendly as possible. This factors in the technical standards, such as BREEAM, as well as how they are designed, how they are built and how the living experience is – for example the type of heating and cooling systems, and air quality. Then it's how we're constructing the buildings and ensuring we've got considerate contractors in place for our developments. This all adds to the premium but is worth it.”
The only way is up
The real estate industry has come so far in what is, in reality, a short space of time, but there is still so much more to do.
“For me, it's just about cohesion,” says Watson. “There are so many different initiatives out there and, as a small company, we need clear direction. What are the two or three really important initiatives that we can get behind as an industry that will make a big difference, rather than spreading ourselves too thinly?”
Sergeant says: “For me, it's the challenge of building with concrete and carbon emissions. There has been a lot of uproar over the M&S store in Oxford Street, which the company wants to tear down and then rebuild an energy-efficient mixed-use building in its place, but the government, concerned about the possible levels of emitted carbon that would be released through demolition and rebuild, is arguing that it should be restored and refurbished. That’s just one example, but how can you marry the need for housing at one end and the need to reduce carbon emissions at the other? The industry has to embrace modern methods of construction and find and use new alternatives to concrete.”
“What are the two or three really important initiatives that we can get behind as an industry that will make a big difference?”
Contributors
Sarah Sergeant, Chief Financial Officer – Watkin Jones plc
Kerry Watson, Group Company Secretary – Watkin Jones plc
Disclaimer
This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.