How to make UK PRS work – with cupboards from China

As PRS developers struggling with razor-thin yields in the UK use operational efficiencies to generate steady returns, US giant Cortland has set up its own Chinese supply chain and is close to leasing its first warehouse as it steps up its own operations. The multifamily operator has begun to draw up plans to use its production arm, Cask, in the UK to supply internal fittings and fixtures for its developments and is also looking at modular build-out to create the economies of scale necessary for build to rent. “One of the lessons we learnt in the US, and are putting in our strategy in the UK, is that scale matters,” says Mike Altman, chief investment officer at Cortland Partners. “You have to have scale so the aggregate management fees allow you to pay for top-quality customer experience, management and marketing. You cannot pay for the same human capital with 1,000 units.” The US giant has 45,000 homes in the US and has so far secured two schemes in the UK. As part of its drive for efficiency, it set up Cask five years ago to provide standardised fittings for all its US products. It had been buying thousands of homes each year as it scaled up, many of which were built in the 1990s and 2000s, and thus needed comprehensive internal refurbishment. Supply it yourself – Cask Industries Cortland’s Cask product ranges, which it designs and sources them itself a series of distributors in China and South East Asia with equipment from faucets to cupboards ■ Supplies products to 137 Cortland properties ■ 69 third-party clients (other than Cortland) ■ Total sales $79.8m to date – with $8.9m to third parties ■ 350 standard products with six finishes, totalling 2,100 products ■ 24,000 “SKUs” in Cortland’s system – variations in design – such as size changes ■ A Shanghai office of 13 which co-ordinates production To cut down on costs, minimise replacement issues, secure supply and improve quality, it decided to standardise and manufacture all its own fittings. In 2017, Cortland said it saved between 40% and 50% on its fixtures and finishes over retail pricing. A team at Cortland designs items from scratch, before sending these to a 13-strong team in Shanghai, which sources them from a network of producers. “We have a number of well-vetted partners manufacturing the physical components, but they do so for us directly, to our designs, with our ratings and product approvals, both UK and US,” says Altman. Items are then shipped to one of nine US warehouses – it has recently also sourced one in the UK – before going on to a development. “If you grow a business at scale, eventually you are in the people business and logistics: logistics was innovative for us to pursue in the US, it’s how you deliver product to your customer,” says Altman. Cortland has not been the first to look at cutting the cost of supply in the UK. Quintain recently announced a tie up with Samsung to supply white goods at Wembley, while Essential Living aimed to standardise many of its fixtures. For rental operators it allows stability and simplicity in supply while cutting down cost and reducing management difficulties. This push for standardisation is also leading Cortland into the modular construction sector in its UK operation, where unlike in the US it is developing all its stock from scratch. “When we started to look at the UK market it was clear in the construction space… nobody was sitting idle enough to build another 10,000 units over five years,” Altman says. “We think this volumetric construction is how you are going to develop housing in the UK.” Due to the supply chain difficulties and labour shortages in the UK, the modular sector is more advanced than in the US. As a result blocks could be shipped from Asia to the UK, or even built in the UK and shipped elsewhere. Cortland is at the early stages of looking at the sector. For rental operators modular construction makes sense as it accelerates build out – which means income producing units complete faster – and it provides stability in delivery rates. In 2017 Greystar announced it was forward-funding the UK’s tallest modular tower, to be built in Croydon. To make PRS stack up, innovation in construction is becoming ever more crucial. Comment: Every efficiency counts The UK housing crisis is about production capacity, and innovation is the most important part of the solution,  writes Mike Altman, Cortland partners chief investment officer. Cortland is part of a growing number of “new-class” developers building homes for rent in the UK to adopt off-site construction – also known as modular homes. This method meets the modern demand for new housing built quickly. While timeframes are project-dependent, off-site-built buildings can usually be produced in about half the time of traditional construction because the development itself can be built in the factory, while the foundations are laid on-site. The reduced requirement for scarce skilled labour, fewer construction accidents, disruption to neighbours and a more consistent build quality compared with traditional construction also appeal to those innovating in the build-to-rent’ sector. The quality of modular homes is exceptional. We can build precision-built homes that are millimetre-accurate and that work differently in regard to heat loss and airtightness – and there’s demand for it. Additionally, with Cask Industries, an internally sourced provider of materials and fixtures, we are a vertical organisation, which is unique to the industry. This division allows us to reduce construction and installation periods by as much as 50%. Because we own the supply chain, we are able to control and maintain the highest standards of construction. But let me spell out for you why this is important – and especially so for the BTR sector. When it comes to income, every little efficiency counts toward our IRR. Being able to source our finishes, fixtures, and flats without the middle man makes a huge difference. As does having standardised pieces: if a faucet breaks it will not take long or be difficult to replace. In a low-yielding, management-intensive sector like the rental market, this needs to be correct from the start and makes all the difference. But even more important than that, modular construction and our own supply chain give us speed and certainty on cost and build-out. If we can build our block six months sooner, that means six fewer months disrupting the neighbours with construction, six months more income, six months where a site is not sitting half finished, and six months where our capital is not sitting idle – where it is making the returns it needs to. Modular means quality, certainty, speed and higher returns. For us, it’s a no-brainer. To send feedback, e-mail alex.peace@egi.co.uk or tweet @egalexpeace or @estatesgazette