diversification – commercial residential markets

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Matt Cooper Director of Treasury and Corporate Finance. Diversification – commercial residential markets. Group Overview. £320m turnover £75m surplus 56,856 homes Aa3 Moody’s rating. We operate in over 100 local authorities, actively developing in about 30. Our objectives. - PowerPoint PPT Presentation

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Diversification commercial residential markets

Matt Cooper

Director of Treasury and Corporate FinanceLewisham1Group OverviewWe operate in over 100 local authorities, actively developing in about 30

320m turnover75m surplus56,856 homesAa3 Moodys rating

Group has developed a live interactive heat-map using GPS technology to help it understand its assets better (can drill down into arrears per property)Focus on populous regions legacy of William Sutton82% London & South EastNo significant demand issues across the countryCurrent development focused on London & the South East2

Our objectivesCore ObjectivesTo be a housing provider of choice;To maintain our financial strength; andTo grow our businessEnabling ObjectivesIncreasing our influence; andBeing an employer of choiceA business for social purpose 3

WHY DIVERSIFY?

Canada Water4Funding ModelGrantDebt

5No differentiationImplicit government guarantee

BorrowingsBanks funding costs have increasedDifficult to borrow long-termNeed to keep relationships M&A, covenant adj for component accountingTougher regulatory regimePressure to increase reserves

Need alternative subsidyMarket saleGenerates a subsidy with return of capitalBuilds on Groups experience and knowledgeFits geographical footprint of the GroupBrings risks that need to be managed

Proactive property charging programme (how many other HAs are this proactive?)Golden rule > 150m propertiesc500m headroom looking to charge c100m this year6Joint Ventures50/50 JVs with developers

Gain expertise from developerShare risk and rewardSpread capacity across more projectsNo recourse to social housing assets

Using JV experience to move towards in-house development7

Build for SaleReturn targetMatrix based approachPlanningSales/MarketCost & deliveryKnowledge/experience

Eg. If 1 high; 2 medium; 3&4 low => 22% RoS

Stress testingCommercial return for taking a commercial riskSensitivities:10% fall in house prices1 year delay in salesReduction in sales rate, eg 1 unit per month

Risk/returnPlanning 45%Sales/Market 30%Cost & delivery 15%Knowledge experience 10%Risk free RoS: 14.3%8Our Financial Golden RulesThese internal rules were established 10 years ago and have been tightened over time. They are reviewed and reinforced annually by the Group Board. Debt service ratio to stay above 115%No reliance on sales to meet underlying obligationsRegeneration of existing stock to be economically positive or neutralContracted development to be covered by cash and available facilitiesDebt to turnover not to exceed 5Sales as a percentage of Turnover not to exceed 30% (excluding regeneration)

Business plan is stress tested against theseSame as last year

Additional Treasury GR - Always have at least 150 million of charged security available

9Development ProgrammeDelivered 805 new homes during 2013/14Rent 539; shared ownership 198; market sale 68Affordable development2011-15 AHP - 2,500 homes2015-18 AHP - 1,800 homesPrivate developmentCity Road 200 unitsFarm Lane 89 unitsHampstead Reach 60 unitsBlackfriars Road 43 unitsBalance delivery of social objectives with maintaining financial strengthUPDATE COMMENTARY BELOW IS LAST YEARSRe-lets assumed to generate 51m in subsidy, based on 5,507 unitsProjection now 3,326, subsidy of 32mLoss of subsidy of 19m

Converting c90% (c100 units per month), uplift c33pw assumed 36pw in original bid

2015-17 Affordable Homes Guarantee Programme 719 units (440 GLA, 279 HCA)2015-18 Programme to run contemporaneously

10

MARKET RENTCoordinated programme of work building on findings from McKinsey

11Current marketOver the last century owner occupation has become by far the most common tenor type; however, since the credit crunch this growth has slowed an started to reverseIn this time PRS has filled the void with twice as many households privately renting now compared to the beginning of the millenniumThe growth in PRS is expected to continueSource: DCLG12InvestmentMajority of the yield is from capital appreciation which is more difficult to monetiseCommercial property, which has a massive institutional investor base, is predominantly rental yieldIt is still very unclear whether this sector will become a more institutionally investor friendly market

Source: DCLG; IPD13Scope of reviewHold the PRS assets in a separate non/limited recourse vehicleThe Group would provide an equity injection of and source external debtFocus on rental income but with some capital growth to ensure that we could liquidate the position if requiredCombined the Groups appraisal assumptions with more generic sector specific onesGeographical spread

14FindingsCan generate 3-6% net rental yieldRental returns are greater outside London and South East (by over 1%) however build costs may need to be below current assumptions to achieve developers profit or else it may not be viableOn a mixed geographical portfolio we can generate c8.5% return over 40 years4% in year 1 and 6% by year 10This return includes 25% developers profitCapital return is required but is risky and difficult to predictCould increase return by focusing on specific areas Need to be careful not to cherry pickMarket data tends to be on a broad area basis

15Capital return is risky, but so is incomeQ1 2014 Prime Rental ValuesSince peakYear on yearCentral London-3.8%-0.6%North West-10.1%-3.0%South West1.3%0.1%Commuter-3.2%1.2%Source: ONS; Savills16PRS - SummaryLooking to generate commercial returnDoes not meet any definition of charitable or social activity

Need capital appreciationDifficult to predict

Even with capital appreciation need developers profitQuicker return and less risk from building and selling the units

Not strategic but may be a tactical solution

17

CONCLUSIONNeed alternative subsidyEither commercial or charitableCommercial return for taking commercial riskBalance delivery of social objectives with maintaining financial strength

Canada Water18

Thank you19

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