For any investor in real estate who, in the short-term, doesn’t intend to sell the property being developed, maximising net operating income (“NOI”) is the core tenet of a successful investment.
NOI is the return or reward to the investor for taking the development risk and planning and constructing the development. It is generally defined as the annual Gross Operating Income (“GOI”) generated by a property less the Operating Costs (“OC”), projected for at least 20 years after completion.
Indeed, the projected NOI of any property investment determines the feasibility or otherwise of the project and is the foundation of any underwriting models.
Furthermore, smart investors know that to maintain and increase NOI not only enhances value and any subsequent selling price, but makes it easier for the investors to refinance or raise funds for any new development.
The current wave of new BtR properties are uniquely positioned to put into practice some of the ways employed to maximise NOI and create additional value for their investors.
Increasing NOI is a combination of increasing revenues and reducing or containing operating costs. Determining how best to do this starts at the very beginning of a BtR project.
So, here are some of the top ways to enhance a BtR property’s NOI, most of which are interlinked and, when applied together, makes for a successful, NOI focussed development:
Superior planning and design
Undertaking advanced market research will help determine the most suitable type, size and functional design of apartments to be created in a BtR development, the supporting amenities required and so on.
By creating an all-round better “product” to meet the requirements of the rental market, BtR developers can expect to stimulate a higher demand which translates into a lower vacancy rate, higher rentals and, naturally, higher GOI.
Of course, rental and income expectations and underwriting assumptions need to be realistic and based on current market rental rates of competitive properties as well as likely growth trends. Over the last year BtR rentals reportedly grew 5.6% countrywide and 2.9% if London BtR properties are included;
Sustainable construction
Refers not only to the choice of buildings material but the
way the building itself is designed.
Building materials should be chosen as appropriate for use but also for their longevity and ease of ongoing maintenance. Choosing more eco-friendly materials other than steel or concrete, such as Ferrock or even pre-cast concrete slabs, may help with energy retention/loss and CO2 emissions during both the construction period and the ongoing life of the BtR building—the latter being far longer than a typical development stage!
After all, the last thing investors want to have to do is regularly repair or even replace inappropriately chosen material for, say, roof decking or part of the cladding of the building. Ease of maintenance goes hand in hand with reducing costs.
The design and orientation of the building, choice of exterior cladding material all make a difference. For example, if windows can be avoided or limited in size on the elevations facing the afternoon sun; or sun shade overhangs built into the design, then these can contribute to saving energy costs for cooling the building.
Similarly, design considerations on how to preserve warmth in winter months can dramatically reduce energy needs, and operating costs;
Efficient building management systems
Essentially managing the operation of the key building services functions as well as identifying predictive maintenance issues, the BMS is a vital tool in controlling operational costs.
However, more and more nowadays, AI (artificial intelligence) systems are being used to supplement BMS systems. Whereas BMS systems can be programmed to receive instructions on how to adjust the heating or air conditioning system according to the time of day or season,
AI can self-determine such matters according to the analysis of data it receives from the multitude of sensors placed throughout a BtR property.
For example, AI will determine when to turn lights on and off or raise or reduce CO2 levels in a building by directing the BMS to turn the HVAC on and off as needed. If these are in line with building guidelines, AI can reduce the outside air intake or bring in additional outside air as required;
Efficient operational and tenant management
Usually operational staff costs are amongst the highest costs of any BtR building operations (as well as energy costs). A combination of automating, as far as possible roles, where a machine or system can take up the responsibility, leaving humans to focus on strategy and managing the machines which manage property will enable the operation to be more efficient and overall operating costs contained.
This may particularly apply in tenancy management where the objectives include to free up staff from mundane rental matters and help focus on minimising rental void periods. With the assistance of AI the demand in the market for a particular BtR building can be analysed, segmented and predicted.
The marketing for the property in question can then be more targeted at likely tenants and deliver more personalised, customer-centric marketing, both reducing vacancies but also saving on otherwise wasted marketing costs.
Boosting revenues by additional income generation
property management used
to be about just “managing a property”, making sure it was in reasonable repair and that it functioned satisfactorily.
With changes in lifestyles and demand for better quality rental properties, investors in BtR projects saw an opportunity to provide “added-value” services to their tenants.
Some of these added services or amenities began to be seen as a profit centres, areas where the GOI could be improved; such areas include:
- car parking: whilst not all BtR tenants will have cars, those who do will need spaces to park and monthly car parking fees can generate additional income;
- similarly, recreational areas such as gym or pools provided in BtR developments can be used only if the tenant becomes a member and pays for the privilege to use such facilities;
- meeting and conference rooms equipped with video arrangements such as Zoom or one of the other video conferencing so that tenants can “work from home” but still interact with their offices on a group basis;
- housekeeping (cleaning, laundry) provided on a package basis, either as built in to the (higher) rent or charged separately according to need and usage;
- reception or concierge type service to not only provide a better ambience (read: higher rents) to the property but to deal onsite with tenants’ requests and requirements—and at a set fee.
Last thoughts
Realistically forecasting calculations of the NOI of a BtR development determines not only the feasibility of a property but its value for the longer-term.
The interaction of revenue and costs is dynamic and forever changing. Accordingly, both GOI and operating costs need to be correctly budgeted and then monitored frequently to ensure that NOI meets expectations of the investors in the property and also the financiers.
Sustainable and eco-friendly BtR buildings are likely to see their NOIs meet targets and grow as demand for a better-quality product increases and operating costs contained.
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