savills.com

Housing Led Recovery?

Investing in the future.

Implications for housing providers.

Robert Grundy – Savills

CIH South East Conference 2013

The wider economy

Housing Led Recovery – investing in the future

Assets and real estate opportunities

Other approaches to funding

Market Rental and investment returns

Creating an investment market

The housing shortfall has widened

0

50

100

150

200

250

300

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Ad

ditio

na

l H

om

es/ H

ou

se

ho

lds in

E

ngla

nd (

000s)

New homes

starts

Household

projections

Source: DCLG

The economic case for housing:

1% extra GDP from

building an

additional

100,000 homes

Source: Oxford Economics

New homes create jobs – but how many??

One new home creates

2 jobs Government Housing Strategy Nov 2011

4.5 jobs Berkeley Group (Ernst & Young) Feb 2012

5.5 jobs HBF 2010

6 jobs Eric Pickles Mar 2011

Most expenditure is in the UK – not Far East....

But does new affordable housing displace market

housing that would otherwise have been built?

Treasury assumption

I new market home displaced by every 2 new affordable

Savills analysis for G15 – affordable housing results in little

or no displacement of market housing

Affordable adds when market capacity is limited

Move away from Section 106 – less competition for land

Beneficial early cash flow to private developers

Source: Additionality of affordable housing, Savills commissioned by G15.

Post 2015?

Post 2015 funding model not

clear.....

Public land?

Procurement?

Flexible tenure including market

rented

Asset management

How and what to develop without

grant?

An era of pragmatism? Is increasing

absolute housing supply higher priority than

low rents and affordability?

Use the property market to better advantage?

Would we make the same investment

decisions now that we have in the

past?

Can the allocation and use of housing

assets across London and South East

be improved?

Business Worth – Net Present Value (NPV)

Per Unit by Asset Group

-£30k -£20k -£10k £0 £10k £20k £30k £40k £50k £60k

£ per unit

NPV of Operating cash flow:

•Rents after voids etc less

•Major repairs, maintenance – from

condition survey

•Management etc

•All adjusted for inflation

NPV per unit

-£100,000.00

£0.00

£100,000.00

£200,000.00

£300,000.00

£400,000.00

£500,000.00

£600,000.00

£700,000.00

London Region NPVs and VPVs

NPV VPV

NPVs and Market Values – London Region

£700k

£600k

£500k

£400k

£300k

£200k

£100k

£0

-£100k NPV

Market Value

NPVs and Market Values – South Region

£700k

£600k

£500k

£400k

£300k

£200k

£100k

£0

-£100k

Market Value

NPV

Gross Initial Yield on Market Value

* Rent/ Vacant Value

* Calculated as annual Social or Target Rent /Vacant Value

NB: Net initial yield after allowing for outgoings is even lower

14%

12%

10%

8%

6%

4%

2%

0%

London - house prices by postcode......

Scope to fund more housing?

London - house prices by postcode

London - house prices by postcode

Housing tenure

Investment strategy – mispriced markets

Value uplift

potential

Unlocking

hidden value

house prices

travel times

quality of

place

A coherent strategy for housing assets??

Can work within borough

Cross borough co-operation to maximise

benefits?

Not just a London issue

The prize – new housing

“Social Cleansing?”

Who has priority? Existing tenants or the un

un – housed??

Resurgence of Local Authorities

Local Authorities – post HRA reform

Resurgent – want to develop

themselves

£30 billion debt cap – for now – may

be relaxed?

Range of funding initiatives

From simple to the complex

Development partnerships

General Fund on lending

New vehicles

Sale and leasebacks

HA’s - Where are we now?

£60bn debt

£4bn bond issues 2012

Constrained bank lending – back book

How much more balance sheet?

Beginning to look at alternative

approaches to funding

Sale and leasebacks

Sale and Leasebacks

What is it?? Selling a leasehold interest in return for a lump sum but

paying rent for a term of years

Recent Examples:

Derwent/ Aviva - purchase of 900 social and target rented. 45 yrs.

£40m. On balance sheet.

Green Square/ Aviva – new build 210 units. £19m. 48 year. On

balance sheet.

Genesis – M&G. 400 market rented Stratford. £125m. Off balance

sheet.

Barking and Dagenham – Long harbour/ Laing O’Rourke. 447

units. 60 years.

LB Ealing – regeneration to provide 200 units – competition in

progress.

Sale and Leasebacks – are they a good thing?

A competitive market – about 6 – 10 serious players

Typically 4.5% initial yield or less - depending on lease term

Reliant on organisations covenant

Uses asset income more efficiently and no loan to value ratio

Other clauses less wide ranging

On or off balance sheet – will rules change?

Are you confident your net income will cover inflation linked

rent liability?

Balance of inflation based funding in your portfolio?

HCA attitude? Cosmo experience. Social housing?

Models of housing provision

Social / Target Rent

Shared Ownership

(NewBuild HomeBuy)

Intermediate Rent

Discounted Market Sale

Purchaser Initiatives –

HomeBuy / FirstBuy /

NewBuy

Affordable Rent – up to 80%

market

Market rent

UK Housing Tenure – More Market Renting?

0%

10%

20%

30%

40%

50%

60%

70%

80%

1918 1940 1950 1960 1970 1980 1990 2000 2010 2020

Pro

po

rtio

n o

f d

we

llin

g s

tock in

En

gla

nd

(%

)

Home ownership Social housing Market renting

Opportunity?

Source: Savills, CLG, Survey of English Housing

Social housing stagnant

Home ownership in decline

In-betweeners

Market renting expected to increase

Policy flexibility

Opportunity for social landlords and institutions

Quality product

12yr to 2012 residential investment returns

0

2

4

6

8

10

12

%

Income Return Capital Return Total Return

Source: IPD

Income return = Net Initial Yield

2012 residential investment returns

-6

-3

0

3

6

9

12

%

Income Return Capital Return Total Return

Source: IPD

Income return = Net Initial Yield

Outlook: strong prospects: benchmark against local market

28 Source: Savills

Finding investment performance -

the sweetspot between yield and growth

5.3% 5.4% 5.5% 5.6% 5.7% 5.7%

5.9% 6.0% 6.1%

6.2% 6.3%

4.4%

3.9%

4.6% 4.7% 4.8% 4.8% 4.9% 4.9% 5.0%

5.1% 5.1%

6.2%

7.0%

6.5% 6.6% 6.7% 6.7%

6.8%

7.3% 7.3% 7.2%

7.7%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

S.West InnerLondon

OuterLondon

East S.East E.Mids Wales Y & H W.Mids N.East N.West

Gro

ss Y

ield

2 b

ed

roo

m p

rop

ert

y

Lower Quartile Yield Average Yield Upper Quartile Yield

Source: Savills, Rightmove

Finding investment performance -

the sweetspot between yield and growth

-1%

0%

1%

2%

3%

4%

0.03

0.04

0.05

0.06

0.07

0.08

S.West InnerLondon

OuterLondon

East S.East E.Mids Wales Y & H W.Mids N.East N.West

Ca

pita

l va

lue

gro

wth

fo

reca

st p

a (

5yr

ave

rag

e)

Gro

ss Y

ield

2 b

ed

roo

m p

rop

ert

y

Capital Value Growth Forecast Lower Quartile Yield

Source: Savills, Rightmove

Finding investment performance -

the sweetspot between yield and growth

5.3% 5.4% 5.5% 5.6% 5.7% 5.7%

5.9% 6.0% 6.1%

6.2% 6.3%

4.4%

3.9%

4.6% 4.7% 4.8% 4.8% 4.9% 4.9% 5.0%

5.1% 5.1%

6.2%

7.0%

6.5% 6.6% 6.7% 6.7%

6.8%

7.3% 7.3% 7.2%

7.7%

-1%

0%

1%

2%

3%

4%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

S.West InnerLondon

OuterLondon

East S.East E.Mids Wales Y & H W.Mids N.East N.West

Ca

pita

l va

lue

gro

wth

fo

reca

st p

a (

5yr

ave

rag

e)

Gro

ss Y

ield

2 b

ed

roo

m p

rop

ert

y

Capital Value Growth Forecast Lower Quartile Yield Average Yield Upper Quartile Yield

Source: Savills, Rightmove

The starting point for investment appraisal –

before stock selection & discount to VP

Less than

6.5% 6.5% to 7.5% 7.5% to 8.5% Over 8.5%

Less than

45%

Westminster

Wandsworth

Lewisham

Ealing

Camden

Islington

Southwark

Hackney

45% to 55%

Bournemouth

Bristol

Colchester

Southend

Brighton & Hove

Oxford

Southampton

Reading

55% to 65%

Edinburgh

Warrington

Stockport

Cardiff

Leicester

Nottingham

Northampton

Portsmouth

Milton Keynes

Medway

Barking & Dagenham

Greenwich

Tower Hamlets

Newham

Over 65%

Newcastle

Leeds

Manchester

Glasgow

Coventry

Birmingham

Forecast Total Returns 2011 - 2021

Pro

po

rtio

n o

f To

tal R

etu

rn f

rom

Ren

t

Identify best locations: market renting and transport

Identify the best locations for investment...

market rental as % of market

Source: Census 2001

Identify the best locations for investment...

Proportion of population 20 – 34 yrs.

Source: Census 2011

Identify the best locations for investment...

Increase in households in market rental

Source: Census 2011

Identify the best locations for investment...

annual rental growth 2010 & 2011

Source: Rightmove

Recent HA buying activity

Fizzy Living/ E Thames. Funded by Macquarie Capital.

Ambitious plans. 2 blocks so far.

L&Q. Parkside Portfolio. £56m. 138 units. High value

London.

Places for People: £19.m. 281 units in 180 southern

locations. Sold by Grainger.

Places for People: Remainder of Terrace Hill’s residential

portfolio. 900 units. Mids and North. C £70m.

HA’s and Market Rental: the future

Now funded mainly by borrowing on social assets

HA’s with depth and strength can fund this way

For how long? Increases risk profile and erodes credit rating?

Non recourse entity – with equity slug

On lend into it – or borrow direct itself

Build scale and track record – 2- 3 years – demonstrate credit

worthiness

Create long term value based on cash flow – yield shift

Extract capital value through (partial) exit to institution

Reinvest

The debt guarantees - overview

Affordable rent/shared ownership

£3.5b

LTV 80%

115% interest cover

Existing assets/equity as security

Minimum debt £5m

Market Rented

£3.5bn

LTV 80%

120% interest cover

125% asset cover

Minimum debt £10m

Up to 30 year term

Draw down on Physical Completion

Debt secured against legal entity (SPV)

Application deadline 31st March 2015

£3bn ‘reserve’ for additional projects

Cost of funds??

RP’s – can already access low cost of funds for affordable but after

initial self funding may see merits of Debt Guarantee for market

rental – depends on strings

Private Co’s/ For profit RP’s – may chose to retain affordable via

For Profit RP. May welcome lower cost of funds – providing no

excessive strings.

Will not appeal to pension funds etc – they are not debt funded.

Debt Guarantees – likely take up.

Landlord Affordable Rent Market Rent

RP – LA or HA Doubtful Probably

Private Co/ For profit

RP Possibly Probably

The wider economy

Housing Led Recovery – investing in the future

Assets and real estate opportunities

Other approaches to funding

Market Rental and investment returns

Creating an investment market