Affordable Home

Ownership Conference

B4: Growing the PRS and engaging with investors

Speakers:

Dominic Martin, Member, PRS Taskforce, DCLG

Kurt Mueller, Director of Corporate Affairs, Grainger

Chair:

Daniel Kaye, Director, Special Projects, Guinness Partnerships

Affordable Home Ownership

Conference

Dominic Martin MRICS – PRS Taskforce

14 May 2014

Government Overview

Demographic Backdrop / Considerations

What is It & Market Activity

Planning

Viability Considerations

Government

Overview / B2R

Context

20

21

Government Overview

Recognition of Tenure: x 3 Housing Tenures

- Private ownership

- Affordable Housing (shared ownership & affordable rents)

- Market rent (PRS)

Sir Adrian Montague review (summer 2012):

- x2 Government funding initiatives (Build to Rent Fund &

Debt Guarantees, Long Term)

- Taskforce (Developers / Investors / Key Issues)

National Planning Policy - Specific Recognition (March ‘14)

Developers / Land

Owners

&

Investors / Banks

22

Government Initiatives:

The Taskforce One Year On

Stakeholders 500 plus Meetings

Government/Gov’t Agencies

Land Owners/Developers

Investors/Funders (inc Banks)

RPs/Local Authorities

Contractors/Developers

Consultants / Agents

Role

Support Government Initiatives: Build to Rent & Debt Guarantees

Valuation

Design

Planning Data /

Research

Management / Lettings

Link Supply & Demand: Land, Developers & Investors

Improve Standards: Management / Valuation / Design / Planning / Data

23

Gov Funding Initiatives:

i. Build to Rent Fund:

Round 1: 5 transactions down. More in the pipeline.

Round 2: £2.8bn Loan App. Shortlisted. C.10,000 units. London &

Manchester.

ii. Debt Guarantee: PRS DG: Aggregator Procurement (Spring 2014)

PRS Taskforce Update

Taskforce:

i. Management: Code of Practice event @ RICS & Industry.

ii. Design: ULI – Build to Rent Best Practice Guide

iii. Valuation: RICS ‘Information Paper’

iv. Planning: NPPF Guidance

Local Authorities Recognise PRS in Local Housing Strategies

Viability Guidance, recognition different ‘economics’, different

approach to planning obligations

Demographic

Backdrop /

Considerations

24

0%

10%

20%

30%

40%

50%

60%

70%

80%

1918 1940 1950 1960 1970 1980 1990 2000 2010 2020

Pro

port

ion

of d

wel

ling

stoc

k in

Eng

land

Owner occupied Social housing Private renting

25

Small Landlords: Much of the

growth in the rented sector has

been driven by individual

landlords. Where 10% all stock,

LL’s with 4 or less properties

Context

Management Considerations

Rental Demand is Growing: PRS houses 4.0 million

households in England, compared

to 2 million in the early ‘80s. Now

greater than AH housing stock

Location 25-34

Manchester 114

Liverpool 90

Birmingham 64

Bristol 64

Sheffield 62

Leeds 61

Newcastle 47

Nottingham UA 44

% Change in employed with

high level qualificationsLiving in PRS

Location 2001 2011 Growth

%

change

Manchester 26,885 58,170 31,285 116

Birmingham 34,508 73,405 38,897 113

Bristol 21,711 43,028 21,317 98

Liverpool 24,604 48,290 23,686 96

Sheffield 18,544 35,760 17,216 93

Leeds 30,599 57,456 26,857 88

Nottingham UA 16,307 29,098 12,791 78

Newcastle 13,466 22,318 8,852 66

186,624 367,525 180,901

26

By Way of Example: 8 ‘Core Cities’

26

Manchester: PRS up by 116% + High Level Qual up by 114%

Liverpool: PRS up by 96% + High Level Qual up by 90%

CLG / ONS

CLG / ONS

Demographic Trends

27

Affordability & Sharing – 8 Core

Cities

Savills – Jacqui Daly (020 7016 3779 / JDaly@savills.com)

Affordability & Culture of Sharing:

1. Particular to cities / local markets

2. Will influence mix of units

3. Eye on:

- Initial Let-up

- Long term: limiting void turn around

- Long term; matching long-term

demographic changes

What Is It

28

Form and Layout

‘Large-scale purpose-designed’ private rental residential

developments can fall into three different building typologies:

Suburban

Urban

Central

Market Activity &

Context

31

32

Market Activity

Not primarily the volume housebuilders

Developers: Dev Sec, Grosvenor, Quintain, Delancey

Housing Associations: Notting Hill, Fizzy Living

Investors: International presence (institutional, sovereign wealth)

Geographic: London, South East & North West

Transaction Type Example Location

Frwd Commitment to Purchase APG: Delancey London

Frwd Commitment to Purchase L&Q & Bellway London

Joint Venture Sigma Barking

Joint Venture Amcorp Properties: Native Land, Grosvenor London

Long-dated Income M&G: Popula HARCA & Be:Here Now London

Site Acquisition Qatari Diar: Delancey (East Village) London

Joint Venture ADIA: Fizzy Living / Thames Valley London/South East

Joint Venture Notting Hill Group & Sellar Properties London

Joint Venture Keystone: Quintain London

Site Acquisition Gatehouse: Sigma Manchester / Liverpool

Site Acquisition Washington State Pension Board: Essential Living London

BTR1 R1 & R2 London,South East,

33

Construction vs Demand

0

50

100

150

200

250

300

350

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Permanent dwellings completed (thousands)

Projected new household formation (thousands)

34

NEW / RECENT HISTORIC

Skyline Central (130 units)

Manchester

Dolphin Square (1,200 units)

Pimlico, London

East Village (1,500 units)

Stratford, London

Hamlet Gardens (150 units)

Hammersmith, London

Halo (400 units)

Stratford, London

Genesis & M&G

Sales & Leaseback

Waverley Court (90 units )

Horsham

Fizzy Living (120 units)

Canning Town, London

Off-Plan Purchase

Viney Court (16 units)

Clapham, London

Existing Examples

Exists Already

Not ‘specifically designed’ as rental

Planning: NPPF &

Viability

35

36

B) PRS & Viability:

“The viability of individual development types, both commercial and

residential, should be considered. Relevant factors will vary from one land

use type to another. For residential schemes, viability will vary with

housing type. For example, in respect of developments of multiple units

held in single ownership as private rented sector housing intended for long

term rental, viability considerations in decision-taking should take account

of the economics of such schemes, which will differ from build for sale.

This may require a different approach to planning obligations or an

adjustment of policy requirements.”

NPPF Planning Guidance

March 2014

A) PRS & Local Housing Strategies:

“Plan makers should look at the household types, tenure and size in the

current stock and in recent supply, and assess whether continuation of

these trends would meet future needs.”

Text thereafter follows in respect of PRS.

37

Viability Negotiations / Local Requirements

Considerations / Examples

- Every LA / Needs Are Different

- Negotiation therefore specific to those needs (no right or wrong approach)

Examples

Local

Authority &

Partner

Date Site Commentary

Birmingham

City Council

& Evenbrook

2010

Browns

Green /

Evenbrook

- AH % Provision: 35% to 25%

- AH Tenure: 100% intermediate

- AH intermediate 20yr covenant

- Local RP annual oversight

City of

Westminster

& Mercers

2014Covent

Garden

- 24 units

- Recognition of PRS value less than OMV

- AH off-site contribution reduction

- Covenant against breakup.

- If converted, requirement to pay back the

discount, indexed by RPI

Local

Authority &

Partner

Date Site Commentary

Birmingham

City Council

& Evenbrook

2010

Browns

Green /

Evenbrook

- AH % Provision: 35% to 25%

- AH Tenure: 100% intermediate

- AH intermediate 20yr covenant

- Local RP annual oversight

City of

Westminster

& Mercers

2014Covent

Garden

- 24 units

- Recognition of PRS value less than OMV

- AH off-site contribution reduction

- Covenant against breakup.

- If converted, requirement to pay back the

discount, indexed by RPI

Viability

Considerations

38

Construction Costs (Height / Region - ECH)

Rents (Annual / Region -

Hometrack)

Cost vs Value

Viability Across UK? (End Value vs Delivery Costs)

Modest

Construction

MMC /

Offsite

40

Andrew Stanford – Director of Taskforce

andrew.stanford@communities.gsi.gov.uk

Dominic Martin – Member of Taskforce

dominic.martin@communities.gsi.gov.uk

Joanna Embling – Member of Taskforce

joanna.embling@communities.gsi.gov.uk

Growing the PRS and engaging with investors

Kurt Mueller, Director of Corporate Affairs

Grainger plc

May 2014

41

Agenda

1. About Grainger

2. Future of PRS

3. Examples

42

Introduction to Grainger

We own. We manage. We develop.

And we offer our skills and expertise to third parties.

Income derived from sales, rents and fees.

• Est. 1912

• FTSE250 company, c. £1bn market cap

• Diversified portfolio comprising:

– c. 9,300 UK wholly-owned reversionary properties:

market value £1.3bn, vacant possession value

£1.8bn

– c. 4,000 wholly-owned market-rented properties in

UK and Germany: c. £0.5bn

– 21,500 properties under management, c. £2.8bn

– On-going development activities

44 44

UK’s largest listed residential landlord and property manager

Business Overview

Future of PRS

45

Sustained growth in demand

for renting

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%

Public perception

• 3 in 5 people agree that renting

is becoming more commonplace

(Grainger survey, 2012)

• More than half believe that more

people will be renting than

owning in the future (Grainger

survey, 2012)

• Half the population believe that

there is still too much pressure

on people to buy a home

(Grainger survey, 2012)

• But owning is still a very strong

aspiration (7 in 10 want to own)

(Grainger survey, 2014)

• Big ‘4’ Drivers for renting:

• Accessibility and Connectivity

• Rental Levels

• Safety & Security

• Management & Landlord

47

Build to rent

• Making it stack up

• Land cost

• Section 106

• Build cost

• Management cost

• Whole life costings

Front of

house –

driving gross

yield

Back of

house –

driving net

yield

Appetite For Risk

Stabilised Assets

Off Plan/Forward Purchase

Development

Rew

ard

Risk

49

Design is critical

50

• Residents should feel as if they are renting

the whole building, not just their flat

• Housing Minister, Kris Hopkins, writes in

the Guide:

“With millions of people renting their homes

from private landlords, it’s vital we do all we

can to increase the numbers of high-quality

properties on offer.”

• To order a copy, go to http://europe.uli.org

51

The future of PRS

• Customer is king

• Learn from the hospitality sector

• Think like a retailer

• Long term investment horizon

• Greater integration between development, engineering,

asset management and property management

52

Examples

53

GRIP – A leading PRS

Fund

INVESTMENT OUTLINE

• £430m market value

• 75:25 owned, APG and Grainger

• Target IRR: 9%

• Rental and capital value growth

• Grainger provides fund, asset and property

management

PORTFOLIO OUTLINE

• Over 1,500 units (ASTs)

• Blocks and clusters

• London and South East focused

• Very high levels of occupancy

• Sustainability a key focus area

• Asset performance

• High quality tenant management

Backed by Europe’s largest pension

fund asset manager

Public sector land

and build to rent

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

55

Royal Borough of Kensington and Chelsea

Forward purchase – London

Rd, Barking

Canary

Wharf –

20 min

Olympic

Park –

20 min

A forward purchase of a bespoke design build-to-rent block from

contractor, Bouygues Development

Investment outline

• 100 units

• Investment value: £13.7m

• Wholly owned

• Net yield: circa 7%

Product

• Well connected location

• Designed for efficiency

• Equal bedroom sizes

• Durable finishes

• Wifi enabled, concierge

Customer 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

56

Accelerated housing delivery

– Berewood, Hampshire

• Master planned by Robert Adam based on

the principles of Garden cities

• 2,550 new homes

• Phase 1 under construction by Bloor Homes

(194 homes)

• Phase 2 sold to Redrow (c.250 homes) – 15

acres for £14.75m an increase of 9% on

Phase 1

• Phase 3 – possible Build to Rent product

(c.106 units)

• Demonstrates accretive delivery as

Montague outlined

57

Thank you

58

Affordable Home

Ownership Conference

B4: Growing the PRS and engaging with investors

Speakers:

Dominic Martin, Member, PRS Taskforce, DCLG

Kurt Mueller, Director of Corporate Affairs, Grainger

Chair:

Daniel Kaye, Director, Special Projects, Guinness Partnerships