Download - Plenary five: Cross subsidy of core activity
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Housing Treasury – Financing Risk
Plenary five: Cross subsidy of core activity
Speakers: Kurt MuellerDirector of Corporate Affairs
GraingerMark JonesHead of Treasury
Derwent Living
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Opportunities in the market rented sector
October 2013
Kurt Mueller, Director of Corporate Affairs
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Agenda
1. Introduction to Grainger plc
2. Our view of the housing market
3. Investing in the private rented sector
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A trader, investor and manager of residential properties.
The UK’s largest listed residential property owner and manager, with over £3bn of residential assets under management across the UK and Germany.
Introduction to Grainger
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Our For Profit Registered Provider
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• Takes advantage of the increasingly blurred lines between private renting and social housing
• Grainger Trust is a ring fenced subsidiary that provides access to new markets
• Initial acquisition of social housing stock at our own development in Hampshire, Berewood
• Additional value to Grainger through fee income at asset and property management level
• Value enhancing to strategic sites and development land in our ownership or control
• Closes the circle of Grainger = Residential
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The market
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A positive environment underpinning Grainger’s strategy
English housing survey for 2011 to 2012
• Total value of residential sector valued at £5 trillion
• £2 trillion of that in London and the SE
PRS is the only growing tenure…
% of homes privately rented
…and owner occupation has been in decline since 2005.
% of homes owner occupied
1999 2005 2012 1999 2005 2012
30%
10%
50%
70%
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Index of Private Housing Rental Prices
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South West
South East
London
East
West Midlands
East Midlands
Yorkshire & the Humber
North West
North East
0.0 2.0 4.0 6.0 8.0 10.0 12.0
7.7
7.6
11.0
8.3
6.0
5.3
7.6
5.5
5.2
England average
8.4Increase in IPHRP from May 2005 – May 2013
• Rents in all regions of the UK have increased in the last 8 years• London has had the most dramatic increase in rental values
Source: ONS - Index of Private Housing Rental Prices - Historical Series
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Rents have increased against volatile, but rising, house prices
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20092008 2010 2012
Index of Private Housing Rental Prices
Source: Halifax House Price Index July 2013; and Index of Private Housing Rental Prices - Historical Series
Both house prices and rents are trending upwardsRents have continued to rise despite houseprice volatility
500.0
510.0
520.0
530.0
540.0
550.0
560.0
570.0
580.0
590.0
600.0
Halifax House price index
2011 2013
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Rent levels in the PRS- Index of Private Housing Rental Prices, ONS
Average earnings increased by 1.4% in the year to Apr ‘13
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Return profiles for property investment
5.76.2
7.0
3.6
4.4 4.96.1
1.1
-0.2 -0.5
6.33.7
4.10.5
1.3
-0.6
0.22.5 1.7 1.4 0.4
6.9
6.0
6.4
10.1
8.29.2
6.6
-2
0
2
4
6
8
10
12
-2
0
2
4
6
8
10
12
%
Income Return Capital Growth Rental value growthTotal Return Inflation
Source: Investment Property Databank 2013
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Why is the demand for PRS growing?
12Source: Savills Research
• Structural changes• Migration flows• Strong young professional mobility• Different work/life patterns• Household size
• Economic changes – affordability issues• Decline of the ‘Bank of Mum and Dad’• University fees – increased student debt• Mortgage illiquidity, particularly for first time buyers• Lower available LTV and higher prices are resulting in increasing
deposits as % of salary• Limited social housing stock increase pool of PRS tenants at the
low-income end
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Market opportunity
Historically has depended upon capital appreciation and trading: now an opportunity for a yield driven model
Growing market with attractive rental performance prospects
Long term out performance: total returns
Fundamental supply and demand imbalance in the UK, particularly London
Very limited number of specialists: requirement/opportunity for a large scale professional operator
Diversification opportunity with a new institutional asset class
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Investing in PRS
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Appetite For Risk
Stabilised Assets
Rew
ard
Risk
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What are we looking for?
• Net yields ~5+%
• Rental growth
• Scale
• Blocks/ concentrations
• Good quality
• Capital value growth
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Rental covenant – Build to rent with local authority partnership
The project outline• Grainger as development management partner• 84 new homes
• (53% PRS, 31% Private sale, 11% Affordable Rent, 5% Intermediate)
• Mix of homes for sale, for private rent and for affordable rent• Including six affordable, four bedroom homes• Public sector land
• Redevelopment of two Council-owned sites • New, high quality homes, mixed tenure (for sale, for rent,
private and affordable) • Grainger is granted a long lease and will manage and let the
properties on the Council’s behalf
“Grainger has impressed [with] their professionalism, understanding of the brief, level of detail and innovation of public and private partnership structure. We look forward to continuing this partnership for the next 125 years.” – Simon Rose, Senior Development Manager, RBKC
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Design – Build to Rent, Barking
Canary Wharf –20 min
Olympic Park – 20 min
A forward purchase of a bespoke design build-to-rent block from contractor, Bouygues UK
Investment outline• 100 units• Investment value: £13.7m• Wholly owned• Gross yield: circa 9%• Cost of management: c.25%• Net yield: circa 7%• Geared IRR: circa 12.5%
Product• Well connected location• Designed with the customer
and management efficiencies in mind
• Equal bedroom sizes• Durable finishes• Wifi enabled, concierge• Possibility of longer term
tenanciesCustomer profile• City workers• Young professionals• Young families• £25k to £60k+ income
Rents ranging from approximately £900/pcm - £1200/pcm
Timeline • Start on site – Jan 13 • Completion – Q2 2015• Fully rented in 6 months
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Land – Berewood, HampshireUsing build-to-rent to increase speed of housing delivery
• A large, greenfield residential development
• Berewood was master planned by Robert Adam based on the principles of Garden Suburbs
• 2,550 new homes
• Phase 1: 194 new homes, under construction with Bloor Homes
• Phase 2: 248 new homes is due to begin in early 2014 with Redrow
• 40% affordable housing, including Grainger Lets, shared ownership and affordable rents
• First Grainger Build to Rent product of c.120 units
• Demonstrates accretive delivery as Montague outlined
• Approved loan in principle from HCA
• Next stage planning and on site in 2014
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Design will play increasing important roleCLG have asked ULI to form a panel to explore possibility of producing a ‘Design Guide’ for PRS
•Focus on difference between PRS and ‘for sale’ market
•Developers, architects, public bodies, engineers, RPs, property companies and advisers involved
•Output planners for Q1 2014
•Impacts on cost of build and on-going operational cost are main drivers
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Opportunities in the market rented sector
October 2013
Kurt Mueller, Director of Corporate Affairs
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The Derwent Approach to Market Renting
Mark Jones – Derwent Living
23th October 2013
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Southgate Court, Derby - Market Rental 102 Apartments
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Trinity Square, Nottingham - Student Accommodation 699 furnished bedspaces
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Derwent Living – structure
Integrated management within DHA
Creation of independent income streams
- Market Rental - Students - Facilities Management
Restriction on guarantees/equity to subsidiaries
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Fundability
Higher risk factors mean it is more difficult to fund conventionally
Stand-alone, supported or combined ?
Higher margins and lower LTV than on conventional funding
Banks v Investors
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Returns
Look for risk premium returns versus Social Housing developments
Returns will vary depending upon geographical area and certainty of income
Mixture of capital and income growth
Meeting investor requirements
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Risk & Flexibility
Security of income over ability to sell
Flexibility to change tenure
Short-term or Long-term investment
Clear exit strategy
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Future Issues & Regulation
Ability to do more within Derwent restricted by regulation. Pressure from regulator to switch existing assets out (and new assets) away from main RP
Keeping product fresh
Where will market rental be in 10 – 20 years time. Embedded as a choice of tenure (like in continental Europe) or a bit part (with the return to owner occupation)?
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Working Together?
Work by Resolution Foundation (with 5 other RPs) to develop joint investment model
Next stage??
Investor appetite good
Other private investors