Housing Led Recovery? Investing in the future. Implications for housing providers.

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1 Housing Led Recovery? Investing in the future. Implications for housing providers. Robert Grundy Savills CIH South East Conference 2013 savills.com

2 Housing Led Recovery investing in the future The wider economy Assets and real estate opportunities Other approaches to funding Market Rental and investment returns Creating an investment market

3 Additional Homes/ Households in England (000s) The housing shortfall has widened Household projections New homes starts Source: DCLG

4 The economic case for housing: 1% extra GDP from building an additional 100,000 homes Source: Oxford Economics

5 New homes create jobs but how many?? One new home creates 2 jobs Government Housing Strategy Nov jobs Berkeley Group (Ernst & Young) Feb jobs HBF jobs Eric Pickles Mar 2011 Most expenditure is in the UK not Far East...

6 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.

7 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?

8 An era of pragmatism? Is increasing absolute housing supply higher priority than low rents and affordability?

9 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?

10 Business Worth Net Present Value (NPV) Per Unit by Asset Group per unit NPV per unit NPV of Operating cash flow: Rents after voids etc less Major repairs, maintenance from condition survey Management etc All adjusted for inflation - 30k - 20k - 10k 0 10k 20k 30k 40k 50k 60k

11 NPVs and Market Values London Region 700, k 600, k 500k 500, London Region NPVs and VPVs Market Value 400k 400, k 300, k 200, k 100, k - 100, NPV NPV VPV

12 NPVs and Market Values South Region 700k 600k 500k Market Value 400k 300k 200k 100k 0-100k NPV

13 Gross Initial Yield on Market Value * Rent/ Vacant Value 14% 12% 10% 8% 6% 4% 2% 0% NB: Net initial yield after allowing for outgoings is even lower * Calculated as annual Social or Target Rent /Vacant Value

14 London - house prices by postcode... Scope to fund more housing?

15 London - house prices by postcode

16 London - house prices by postcode

17 Housing tenure

18 Investment strategy mispriced markets Value uplift potential Unlocking hidden value house prices travel times quality of place

19 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??

20 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

21 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

22 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.

23 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?

24 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

25 Proportion of dwelling stock in England (%) UK Housing Tenure More Market Renting? Social housing stagnant Home ownership in decline In-betweeners Market renting expected to increase Policy flexibility Opportunity for social landlords and institutions Quality product 80% 70% 60% 50% 40% Home ownership Social housing Market renting Opportunity? 30% 20% 10% 0% Source: Savills, CLG, Survey of English Housing

26 12yr to 2012 residential investment returns 12 Income Return Capital Return Total Return 10 8 % Income return = Net Initial Yield Source: IPD

27 2012 residential investment returns 12 Income Return Capital Return Total Return 9 6 % Income return = Net Initial Yield Source: IPD

28 Outlook: strong prospects: benchmark against local market Source: Savills 28

29 Gross Yield 2 bedroom property Finding investment performance - the sweetspot between yield and growth 8.0% Lower Quartile Yield Average Yield Upper Quartile Yield 7.7% 7.0% 6.0% 5.0% 7.0% 6.2% 5.3% 5.4% 4.4% 6.7% 6.7% 6.5% 6.6% 5.5% 5.6% 5.7% 5.7% 4.6% 4.7% 4.8% 4.8% 7.3% 7.3% 7.2% 6.8% 6.2% 5.9% 6.0% 6.1% 5.1% 4.9% 4.9% 5.0% 6.3% 5.1% 4.0% 3.9% 3.0% S.West Inner London Outer London East S.East E.Mids Wales Y & H W.Mids N.East N.West Source: Savills, Rightmove

30 Gross Yield 2 bedroom property Capital value growth forecast pa (5yr average) Finding investment performance - the sweetspot between yield and growth 0.08 Capital Value Growth Forecast Lower Quartile Yield 4% % % % % 0.03 S.West Inner London Outer London East S.East E.Mids Wales Y & H W.Mids N.East N.West -1% Source: Savills, Rightmove

31 Gross Yield 2 bedroom property Capital value growth forecast pa (5yr average) Finding investment performance - the sweetspot between yield and growth Capital Value Growth Forecast Lower Quartile Yield Average Yield Upper Quartile Yield 8.0% 7.7% 4% 7.0% 6.0% 5.0% 7.0% 6.2% 5.3% 5.4% 4.4% 6.7% 6.7% 6.5% 6.6% 5.5% 5.6% 5.7% 5.7% 4.6% 4.7% 4.8% 4.8% 7.3% 7.3% 7.2% 6.8% 6.2% 5.9% 6.0% 6.1% 5.1% 4.9% 4.9% 5.0% 6.3% 5.1% 3% 2% 1% 4.0% 3.9% 0% 3.0% S.West Inner London Outer London East S.East E.Mids Wales Y & H W.Mids N.East N.West -1% Source: Savills, Rightmove

32 Proportion of Total Return from Rent The starting point for investment appraisal before stock selection & discount to VP Forecast Total Returns 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

33 Identify best locations: market renting and transport

34 Identify the best locations for investment... market rental as % of market Source: Census 2001

35 Identify the best locations for investment... Proportion of population yrs. Source: Census 2011

36 Identify the best locations for investment... Increase in households in market rental Source: Census 2011

37 Identify the best locations for investment... annual rental growth 2010 & 2011 Source: Rightmove

38 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.

39 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

40 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 31 st March bn reserve for additional projects

41 Debt Guarantees likely take up. Landlord Affordable Rent Market Rent RP LA or HA Doubtful Probably Private Co/ For profit RP Cost of funds?? Possibly Probably 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.

42 Housing Led Recovery investing in the future The wider economy Assets and real estate opportunities Other approaches to funding Market Rental and investment returns Creating an investment market