The Mishcon Academy Digital Sessions. Conversations on the legal topics affecting businesses and individuals today.
Ed Hughes-Power, Partner
Mishcon de Reya
In this episode, we’re talking about the Watkin Jones Group and its involvement in the alternative residential market, particularly the student and build to rent sectors. Both sectors have been consistent performers in the real estate market over the last few years and especially during the Covid pandemic and the outlook for the real estate sector remains uncertain. Can they continue to provide steady returns in an uncertain Covid and post-Brexit environment?
Hello, and welcome to the Mishcon Academy Digital Sessions podcast. I am Ed Hughes-Power, a Partner in the Real Estate Team at Mishcon de Reya and I am joined remotely by Alex Pease, Chief Investment Officer at Watkin Jones, the UK’s leading developer and manager of residential for rent, with a focus on the build to rent and student accommodation sectors.
Thank you, Alex, for giving up your time today, it’s really appreciated. The Watkin Jones Group, originally founded in the northwest from my neck of the woods, it’s really been a bit of a success of late and the business has increased revenue year on year. What do you think is the secret to that success?
Alex Pease, Chief Investment Officer
Watkin Jones
Hi Ed. I don’t think it’s a single secret, I think it’s been a sort of huge combination of hard work and evolution of the business and I think it’s really looked to take advantage of our historic roots and, you know, our contracting heritage and how we’ve manage to transfer that through to a development business and then onwards to becoming really a, I guess what we’d call a vertically integrated platform where we have all the expertise in house to secure new opportunities, underwrite the sort of development risk and the technical risks, drive the planning permissions internally and then we’ve got the contracting ability to build it and really understand that key aspect of property development and then we’ve also got the operational arm in Fresh who are able to sort of not only provide the operation to the customers but also give us valuable insights in terms of how we want to develop the buildings, how we want to innovate, how we want to take them forward so, it has been an evolution of a business and, you know, we’ve graduated from that contractor mentality which is relative insular and you are delivering someone else’s product, to that developer who wants to work with institutions and learn from them, to now where we are sat which is a developer who is really looking to take advantage of our customer insights and really be at the forefront of bringing product that people want to live in.
Ed Hughes-Power, Partner
Mishcon de Reya
So, obviously student accommodation has been one of the key parts of the business. You’ve moved into build to rent a few years ago. What was the reason for that? What attracted you to that sector?
Alex Pease, Chief Investment Officer
Watkin Jones
I think the key word here is ‘synergies’ and we very much enjoyed working in the student accommodation sector and we’ve learnt a huge amount about how to build sort of residential for multi-occupancy and residential for rent and I guess really taking the themes about community and really attracting people to live just not in a building but in a place and a community with others. So, when we started looking at build to rent, we actually looked at the synergies between the two sectors and we realised they were much more pronounced than perhaps we had first thought and they existed across a whole number of levels so, we could look at the geographic synergies. What drives student accommodation? Well, Universities. What drives build to rent? Well, you are really looking for employment zones and employment centres, and employment centres quite typically come up where there’s good higher education opportunities. So, first off, the geography was very, very similar, we could target the same cities and towns for two different product types. I think that operational ethos then comes into play and as I said, you know, the key thing that we do is looking to create communities within buildings and it’s exactly the same ethos between build to rent and student accommodations, they are very, very similar operationally and so we looked to leverage our operational expertise on that side. I think that equally, we can look at the investment market and the investment underwrites for the sectors and, again, there’s a huge number of institutions who are looking for overall exposure for the living sector and that includes both PBSA and build to rent and so, again, it was a logical adjunct for us so, when we started adding all these sort of similarities up, it did sort of fall into the no brainer camp for us to look to get involved.
Ed Hughes-Power, Partner
Mishcon de Reya
And would you look to the sort of third element of the rental market which is the sort of senior living? Is that something you might consider in the future? I know you are focussing on student and build to rent, and build rent traditionally has really looked at the sort of, what we call the young professionals, you know, early twenties to mid-thirties type market, would you ever consider moving into that sector as well?
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, absolutely. Our manifest, as a developer, we want to be the UK’s leading developer in residential for rent as a whole and, you know, residential for rent is a broad church and we do see the lines blurring between a lot of these sort of subsectors so, absolutely our involvement in student accommodation, build to rent, we are looking to extent into co-living which is another one of these sort of natant living sectors but, you know, we can easily see ourselves looking at that retirement living for rent and we think it’s underpinned by very attractive demographics, there are again sort of huge similarities in the construction process and the operational ethos so, I think again, it would be a no brainer for us to start looking into that sector.
Ed Hughes-Power, Partner
Mishcon de Reya
Makes sense. I mean you probably regard yourself as quite lucky at the minute because if you look across all the real estate sectors at the minute, during the pandemic, and which have done better than others, build to rent has been right at the top of the tree, certainly in terms of rent collections, you know, plus 90% I think across the industry. Student accommodation has obviously been probably a little worse affected but I think that’s probably a short-term problem is not rather than a long-term problem?
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, I mean, when we look at build to rent, we do see one of the very, very few benefits to come out of Covid, is that it might be an opportunity for build to rent to earn its spurs and really differentiate itself from I guess some of the other more traditional residential options for renters and again, sounding like a cracked record, but it is about that fostering community, it is about that encouraging people to interact and to making a building more than just a building and making it a home and making it a community. I think on student accommodation, undoubtedly there are operational difficulties, pronounced difficulties which the whole sector is having to deal with and they are bespokely orientated around Covid and the closing of Universities. That said, ourselves, as a house, and we believe the wider investment market, are able to look beyond that and there is good reason for optimism in the student accommodation space. Higher education in the UK is still absolutely, you know, a world leader and a real asset to the country. I think the sort of political headwinds that there were in terms of sort of international students have certainly lessened and there is a lot more encouragement from the Government to support that side of it and I think in terms of the sheer demographics, you know, the 18-21 year olds living in the UK at the moment has been on a sort of downward decline for a number of years and next year is the first year that we start seeing an uptick in this and it will go on for a good number of years so, I think overall the mid-term picture for student accommodation is very, very positive and it’s a sector that we look forward to continuing participating in.
Ed Hughes-Power, Partner
Mishcon de Reya
Absolutely. So, just coming back to the Watkin Jones business, obviously Richard Simpson joined as Chief Exec in January 2019, he’s been there for a couple of years now. How do you think the business has changed since Richard joined?
Alex Pease, Chief Investment Officer
Watkin Jones
Well, I think Richard has had a huge impact on the business and, as I said, I think it’s sort of more been in the evolution than the revolution, you know, we’ve taken big steps when we floated the business in 2016 and a lot of the business has changed and we’ve looked to evolve our processes and our working practices, I think Richard’s come in with a very clear, strategic direction and, as I said, the way we look at it is, we were very a good contractor and then we’ve been a very good developer, partnering with institutional capital and that was our sort of middle phase and now we are really turning our attention to be absolutely at the forefront of the customer experience and using customer insight to drive our developments going forward and I think that’s a really important direction for our business to be going in.
Ed Hughes-Power, Partner
Mishcon de Reya
So, I suppose actually in a way, your Fresh, the sort of student accommodation management division which is, I understand it, the sort of the third largest operator platform in the UK. Do you think by having the management capability, it’s changed the way you develop the buildings that you are doing? It must have benefitted the way you look at your developments and how you… and what, ultimately, is going to be the customer experience.
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, undoubtedly, I think having an operational management arm within the business gives us a huge advantage and we look to utilise Fresher’s insights across the whole spectrum of our development process. We look to liaise with them about the markets we are targeting and, you know, what those markets need. We look at the competitor analysis and understand really what the customers are wanting in those micro locations because often it is not a one cap fits all process. I think in terms of the buildings we deliver, their insight is invaluable in really telling us what the customers want, where should we be deploying our capital, you know, is it in common rooms, is it in sky lounges, is it in swimming pools and, again, it’s trying not to be myopic about it and actually treat each development as an individual and, yeah, their expertise is fantastic to help us along that way. I think also, just having that enduring exposure to a building once it’s delivered, is incredibly important for us, it gives us that additional buy-in so that once we’ve rolled off site, you know, we’ve still got that connectivity to the site and that desire to see that site perform well.
Ed Hughes-Power, Partner
Mishcon de Reya
And then just staying with the sort of development side of it and looking at how you think that perhaps the pandemic might have affected the way in which you develop your buildings and what you are providing. How do you think that’s changed when you are, you know, looking at your next scheme that you are going in for planning for? Is there anything that’s changed do you think as a result of the pandemic? I mean, the obvious thing as I see it is, the reality is that we are all working from home at the minute, that’s going to continue certainly for the foreseeable next couple of months, I mean, in long-term the reality is most people are going to do at least one or two days a week at home, depending on the nature of their business. Have you looked at that in terms of the design of the developments and whether anything is going to change?
Alex Pease, Chief Investment Officer
Watkin Jones
Yes we have and look, we’re constantly trying to look at innovation and look at trends and I would say that it’s probably too early to really garner true trends stemming from Covid, I think we’re still right in the midst of it so, you know, we don’t want to make kneejerk reactions but in all honesty, I guess the work from home, we’d kind of already recognised that as a logical direction for particularly build to rent and we’d started looking to adapt that into some of our buildings anyway so, we’ve recently completed a building in Bournemouth for build to rent where we’d equipped half a floor as effectively a business lounge, you know, rentable spaces, very good internet connectivity, a whole range of work stations to enable that sort of live-work balance within a building so, yes we can see that trend continuing and it’s a logical conclusion from Covid and the circumstances we find ourselves in but there’ll be other trends emerge and it’s our job to make sure that we are constantly assessing them.
Ed Hughes-Power, Partner
Mishcon de Reya
Yeah, student accommodation, we talked about it early actually in terms of international students and the effect that Brexit may have on the pull of international students because obviously one of the key things that, for example the Far East market particularly Chinese students, I mean they come over to our Universities because they realise the quality of the education they are going to receive. Do you think that as a result of any changes to the market over the last year whether that’s going to affect the pull or international students or do you still think that’s going to still be a high proportion of the students who ultimately occupy buildings that you’ve developed?
Alex Pease, Chief Investment Officer
Watkin Jones
No, I mean to date we remain very confident in UK higher education and its pull to international students and we don’t see that changing and as we chatted about earlier, you know, I think Government rhetoric has improved dramatically in terms of…
Ed Hughes-Power, Partner
Mishcon de Reya
It has changed, you are right.
Alex Pease, Chief Investment Officer
Watkin Jones
…welcoming the impact that international students can have on our economy and on our society so, I think that’s a real positive part of it, you know, clearly with us now leaving the EU and our Universities aren’t able to offer the cheaper rates for education to EU students, clearly that will have some impact but if you look at the overall numbers of EU students that were studying in the UK, they only made up about 6% of the student body and I think it’s massively outweighed by the weight of international students who aren’t able to get places at the moment so, we do believe that they’ll balance each other out and we should still have a continued demand from the international study bodies.
Ed Hughes-Power, Partner
Mishcon de Reya
A lot of real estate companies have held back during the pandemic to work out what is the best strategy going forward and it seems to me there was an initial period in March/April last year where we really didn’t know how things would play out but it seems to me that, and you know we’ve talked about it before in terms of your positive outlook on the build to rent and student markets which has probably driven your strategy and literally, you have been very active, probably since last summer, in terms of buying up sites, building up stock, going into planning and getting sites out and developed which is a really positive tone particularly at the minute and is that because presumably your outlook on the markets is, this is a long-term play, there’s been very little impact in terms of investor appetite? Presumably, you are pretty positive about the sort of next six to twelve months?
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, I think one of the advantages we had as we headed into Covid was relatively recently when Richard had joined the business, we had undertaken a deep dive into all of the sectors that we were operating in, we’d really got under the skin of the demographics, the drivers behind them and as such, when Covid did arrive, we had a huge amount of confidence in the underlying features of the markets and how they will perform when you have external shocks or when you have economic downturns so, that said, we did pause, absolutely, when Covid hit, we wanted to really assess the outlook, the risk, you know how the markets were perceiving it and also how our model was enduring it, how we were set up as a business and so we spent a good amount of time making sure that we were still fully functioning and we had good confidence in our cashflows and our abilities to progress and during that time we were very honest with the market as well, we didn’t want to kid the market that we were active when we weren’t so we made it very clear what we were doing and I think people appreciated that so, when we did sort of get comfortable with exactly where we were as a business and it wasn’t too big a leap for us to then start really looking at the market and saying well how can we look to do more and capitalise on the land market which was a little bit more subdued and that’s’ what we’ve been looking to do and we’re trying to do it in a very sensible way, we’re trying to assess the markets on their merits and not necessarily just find the 50p in the pound deals, you know, they haven’t really materialised anyway so, we’re putting the right levels of caution in our underwrites and, you know, we hope we’re doing some sensible deals.
Ed Hughes-Power, Partner
Mishcon de Reya
Excellent. Just touching on build to rent in particular, you know, there’s this mantra we hear coming out the Government, ‘Build, build, build’ which is all very well and good but I think the rhetoric that actually if you get down into the granular detail and this year’s resi conference which was a slightly different type of conference this year with Robert Jenrick, I mean he talked about this Boris mantra of ‘Build, build, build’ and recognising the central role of housebuilding in the economy yet I don’t think at any point he mentioned the build to rent sector and the Government white paper didn’t mention build to rent, and I think when Mark Eastern, the BBC guy asked him about it, he thought it was some form of affordable housing and, I mean, he didn’t even really understand the concept of build to rent. I suppose the big concern that a lot of people have is, do we need to better educate the market, Local Authorities, Government, on what this build to rent product is when that probably means all of us, you know, the developers, operators, advisers, what should we be doing do you think to better educate everyone about the build to rent product?
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, I think it was disappointing obviously to not have the mention of build to rent. That said, I mean I think there has been huge steps in the right direction in terms of recognising build to rent as an asset class in itself and I think the simple fact we now have an affordable product, discounted market rent which actually will work for build to rent operators, is a clear sign and acknowledgement this is a valid sector but, yeah absolutely, I think we all need to pull together and continue to demonstrate to the real attributes that build to rent has as a sector, you know, I think the BPF do a fantastic job acting as that sort of champion for build to rent and they’ve been very influential in trying to inform Local Authorities wider national Government of its real attributes and the fact is that we have had a housing shortage for a long time now and we’ve gone through, you know, a huge array of Housing Ministers looking to sort of solve this problem and it’s our fundamental belief that build to rent can be a catalyst to increase housebuilding in the UK, you are able to deliver many more units in one go under a build to rent scheme than you are on sort of build to sell where they tend to stagger the release of the units and, again, we do think there is a changing of the guard in terms of people’s aspirations, there’s always going to be people who want to buy and have their own home but the population is changing, it’s becoming a lot more transient, people are looking to move away, travel, work in different cities, different locations and they are wanting to be a lot more footloose and build to rent is absolutely the disrupter in the residential market which offers them, you know, I guess that sort of different way of living.
Ed Hughes-Power, Partner
Mishcon de Reya
I think you are right, aren’t you? I mean, our generation people probably think, actually you know, we want to own our own homes but I think nowadays I think younger people are looking at this very differently, they don’t necessarily want to own their own home, they are very happy to rent, certainly for, you know, maybe the first sort of ten/twenty years of their careers so, it’s a… no, it’s interesting times for sure.
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, I mean, I think there’s always the assumption that people are renting through necessity as opposed to renting through choice and, you know, undoubtedly there are drivers towards the rental market, you know, it’s you know mortgage availability is reduced, you know, people, buy to let landlords have lost a lot of the sort of tax incentives that enabled them to sort of hold their build to let properties so that there are push factors but there are so, we shouldn’t, you know, underestimate the pull factors. The fact that people can get a better quality of accommodation, they can gain a community, they can gain a better location, all through renting as opposed to buying and I think there’s also an adjunct to student accommodation, a lot of these guys sort of coming through have spent their University days living in, you know, high quality, highly amenitised, highly serviced student accommodation blocks and it’s a bit of a strange journey to step backwards and rent something poorer when they’re now in the sort of employment so, I think build to rent can carry on that narrative that student accommodation has started.
Ed Hughes-Power, Partner
Mishcon de Reya
Yeah, absolutely. Collaboration is always a big buzzword in our industry, particularly at the minute. I was interested to just hear a bit more about your partnership with Cranfield University and how did that arise and do you expect to enter into other partnerships to help regenerate aging campuses elsewhere in the UK?
Alex Pease, Chief Investment Officer
Watkin Jones
Yeah, I think working with universities in the UK is something that we have always done and, you know, it’s a really important part of our business and we certainly hope to do more. I think, as you say, universities are still the predominant landlord in student accommodation in the UK, albeit it that, you know, over the recent years it has been the private providers who have really sort of taken up the mantra and delivered the beds but universities do have huge stockholdings and a lot of them are aging and a lot of them aren’t fit for purpose and I think, you know, the universities have realised that student accommodation is an important part of their offering to their students and they are competing for students and they want to improve that offering so, absolutely there’s opportunities for the likes of Watkin Jones to partner with universities and look to improve the offering for their students. Cranfield, in particular, we went through a competitive process, we had really good dialogue, we really respected what Cranfield wanted to achieve in terms of the product and the quality and the timeframes that they wanted to achieve it and yeah look, we went through that competitive process and ended up being successful and delivering them sort of nearly 700 units.
Ed Hughes-Power, Partner
Mishcon de Reya
Yeah, no, it’s excellent. I want you to do your best Mystic Meg now, Alex. In five years’ time, how do you think each sector will fair?
Alex Pease, Chief Investment Officer
Watkin Jones
Well, I’m bound to be positive about both of them but you know it is a genuine belief I think, you know, build to rent will really have, you know, found its legs and will be pushing on and will be, you know, a major contributor to sort of housing supply in the UK. I think also on the build to rent side people will start recognising that it is a different product and there are key points of difference to build to rent to other residential provision and I think that will also be important in its sort of the catalysing of the sector. I think student accommodation will continue to progress, as I said, I think we’ve got huge confidence in the underlying demographics in the sector and I think, you know, we will see some innovation, you know, we’re currently very much looking at how we can create a better product and be more in tune with exactly what the students want so, yeah, I think both sectors will continue to perform strongly.
Ed Hughes-Power, Partner
Mishcon de Reya
Nice to end on a positive note, particularly at the minute. No, thank you, Alex. Well, for now, let’s wrap it up there, Alex. Really helpful, really interesting some of the points we touched on there. So, I’d like to say thank you very much to you for joining me for this Mishcon Academy Digital Sessions podcast. I’m Ed Hughes-Power and do look out for the next episode in the series.
The Digital Sessions are a series of online events, videos and podcasts, all available at Mischon.com and if you have any questions you’d like answered or suggestions of what you’d like to have us to cover, do let us know at digitalsessions@mishcon.com. Until next time, take care.
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