Future of the Private Rented Sector: New Investment Models

The Future of the Private Rented Sector New Investment Models December 2012

Agenda 08.00

Arrivals – breakfast served

08.25

Welcome – Richard Parker, Partner, PwC

08.30

Chair’s introduction – David Lunts, GLA & Future of London

08.40

Speaker panel: Harvey Griffiths, Chief Executive, HIF Group David Montague, Chief Executive, L&Q London Housing Association John Webber, Associate Director, Corporate Finance, PwC

09.20

Questions to panel and discussion

09.55

Chair’s summing up

10.00

Coffee and networking

10.15

Close.

The Future of the Private Rented Sector PwC

December 2012 Slide 2

Agenda 08.00

Arrivals – breakfast served

08.25

Welcome – Richard Parker, Partner, PwC

08.30

Chair’s introduction – David Lunts, GLA & Future of London

08.40

Speaker panel: Harvey Griffiths, Chief Executive, HIF Group David Montague, Chief Executive, L&Q London Housing Association John Webber, Associate Director, Corporate Finance, PwC

09.20

Questions to panel and discussion

09.55

Chair’s summing up

10.00

Coffee and networking

10.15

Close.

The Future of the Private Rented Sector PwC

December 2012 Slide 3

Agenda 08.00

Arrivals – breakfast served

08.25

Welcome – Richard Parker, Partner, PwC

08.30

Chair’s introduction – David Lunts, GLA & Future of London

08.40

Speaker panel: Harvey Griffiths, Chief Executive, HIF Group David Montague, Chief Executive, L&Q London Housing Association John Webber, Associate Director, Corporate Finance, PwC

09.20

Questions to panel and discussion

09.55

Chair’s summing up

10.00

Coffee and networking

10.15

Close.

The Future of the Private Rented Sector PwC

December 2012 Slide 4

PRS - Investing Institutional Capital into the Capital December 2012

PRS – Investing Institutional Capital into the Capital

1.

Housing Investment Funds (‘HIF’)

2.

PRS investment overview

3.

The need for institutional capital into PRS

4.

PRS assets

5.

Institutional investment

6

Housing Investment Funds (‘HIF’) • Housing Investment Funds Group (‘HIF Group’) set up specifically to invest institutional capital into social, affordable and market rent housing • Bringing new institutional capital into the sector, where bank, grant and HRA funding are highly constrained or no longer available • PRS investment provided through two HIF Funds : • HIF : 45 year FRI – RPI lease with a LA / RP limited to 25% PRS • HIF – PRS : Outright purchase of PRS with LA / RP tenant, tenancy, management and maintenance

• Dedicated, experienced housing investment team • Replicating track record of other businesses and institutional investment funds (more than £0.8bn of equity in Equitix (PFI), MedicX (GP Surgeries), Signature (Premium Care Homes))

7

PRS investment overview • 16.5% (3.6m) of households are in the private rented sector (up from 10% from 10 years ago) • Number of households in the private rented sector has increased by 81% since 2000 • Trend driven by lack of mortgage availability and requirement for high deposits for would-be buyers Change in tenure 2001-11 (million households)

Change in tenure (million households) 16

2.0

14 1.5

12 10

1.0

8 6

0.5

4 2

0.0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008-09 2009-10 2010-11

0

Owner Occupiers

Social Renters

-0.5

private renters

Source: English Housing Survey, full household sample, English Housing Survey Headline report 2010-11

owner occupiers

8

8

social renters

private renters

PRS investment overview •

Population expected to grow by 385,000 pa until 2031

•

More households being formed (est. 250k pa until 2031*)

•

2/3 of increase in new households accounted for by single persons

•

Restricted availability of mortgage finance and requirement for large deposits

•

“The private rental sector [is] now a natural stage in the homeownership cycle. Renting is the only option for a growing number of individuals and families” – CEO, Countrywide Estate Agency

Gross mortgage lending 2007 – Q1 2012

Permanent dwellings completed

200,000

50,000

Q1 '12

Graph source: Council of Mortgage Lenders *Source: Housing Statistical Release “Housing Projections to 2031, England”, 11 Mar 09

Graph source: www.communities.gov.uk/housing/housingresearch/ Live Table 209, date: 16-02-12

9

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

% of peak (RHS)

1992-93

0 1991-92

Q4 '11

Q3 '11

Q2 '11

Q1 '11

250,000

1990-91

Gross mortgage lending £bn (LHS)

Q4 '10

0% Q3 '10

0 Q2 '10

20%

Q1 '10

20

Q4 '09

100,000

Q3 '09

40%

Q2 '09

40

Q1 '09

150,000

Q4 '08

60%

Q3 '08

60

Q2 '08

80%

Q1 '08

80

Q4 '07

100%

Q3 '07

100

Q2 '07

120%

Q1 '07

120

Supply and demand • • •

Virtually nil housing built specifically for private rental (outside small BTL landlords) PRS dominated by small landlords with limited resources to invest / develop new housing Supply of rental property further reduced by drop in buy-to-let activity

No of properties owned by private landlords 3%

1% 1%

•

Over 50% of householders in PRS < 35

•

68% of new households start in PRS

•

62% of recent movers, moved to PRS

•

41% of private renters do not expect to owner occupy at some point in the future

Private landlords by type 5%

0%

17%

6% 89% Private individuals

1 only 2-4 5 -9 10 - 24 25 - 100 more than 100

Companies Other organisations

78% Graph source: Private Landlords Survey 2010

Graph source: Private Landlords Survey 2010

1 0

The need for institutional capital into PRS •

The number of households in PRS has increased by 28% since 2007

•

A quarter of London households now rent privately

•

Around half of tenants are under 35

•

The number of families with children in the PRS has almost doubled since 2007

•

Rents in London increased by 16.6% in 2010 and 8.4% in 2011 and 10% in 1012

•

There are now forecast to be more private tenants than council and HA tenants Source JLL Residential Eye – November 2012

1 1

The barriers to institutional investment into PRS - Montague Report • Review of the barriers to institutional investment in private rented homes • Barriers

• Recommendations

• Rent controls

• Planning support

• Restrictions on gaining VP

• Release of public sector land

• Planning constraints

• Funding support

• Low net (cash) yields

• Need for a PRS governing body

• Management risk

• Government task force to act as enabler of PRS

• Reputational risk

• Quality standard / branding to distinguish the product

1 2

Opportunity to invest institutional capital into PRS • Lack of traditional mortgage and equity funding • Mortgage lending heavily constrained • Equity (deposit) requirements are high (30% to 40%) • Lack of housing supply • Sales prices subdued • Developer lending heavily constrained • Developer equity requirements are high

1 3

Opportunity to invest institutional capital into PRS • Large, long term and growing market • Marked shift from owning to renting, expected to continue in the medium to long term • Opportunity to deliver supply to meet demand • Housing market concerns that current supply being met by private landlords of varying quality and tenure • Opportunity for LA’s and RP’s to meet demand by providing an element of PRS • Opportunity for institutional investors to be FundCo : equity + debt = 100% investment • LA / RP role to be OpCo and / or PropCo

1 4

PRS assets • Prices have fallen / stabilised • Rents are strong and rising • Gross and net yields becoming more attractive • Needs professional management - tenant, tenancy and property management, maintenance and lifecycle are critical • RPs and LAs to manage, maintain, control and regulate stock, tenants and tenures • Property offering and differentiation is critical to attract right tenants

1 5

Institutional investment • Institutional investors need tangible cash income / yield now over capital growth at some point in the future (although that is also helpful) • Professional management essential at every level - tenant, property and institutional / fund • Need investment structure / vehicle for institutions to invest • Listed / unlisted equity funds, including REITs? • Returns dependent on debt • Strong appetite to replicate the US and European institutional investment funds

Appettite to invest institutional capital into the capital

1 6

Contact

17

David Montague, Chief Executive, L&Q London Housing Association

The Future of the Private Rented Sector PwC

December 2012 Slide 19

John Webber Social Infrastructure, Corporate Finance, PwC

The Future of the Private Rented Sector PwC

December 2012 Slide 20

Contents

1.

2.

3.

4.

5.

6.

PwC

Current investment in private rented sector Barriers to private sector investment Financing options Example delivery models Potential local authority role Managing risk

PRS: New Investment Models December 2012 Slide 21

Current investment in private rented sector • Private rented sector houses 3.6m households • Only 1% of landlords own more than 10 homes • Limited track record of large scale private investment • Historically, not a significant creator of new house building • Objective: To encourage large scale private investment in the sector

PwC

PRS: New Investment Models December 2012 Slide 22

Barriers to private sector to investment in the sector • Risk profile may not be appealing to institutional investors • Predicted income yield perceived to be too low for given risk • Actual yields earned higher than commercial property when capital gains are included • Lack of investment track record to show to investors

PwC

PRS: New Investment Models December 2012 Slide 23

Types of financing • Prudential borrowing • Private placement or markets bond issue • Bank finance • Asset backed finance (institutional finance) • Private equity finance • Government loan guarantee scheme

PwC

PRS: New Investment Models December 2012 Slide 24

Some example delivery models • Local authority owned, managed, maintained and financed • Privately owned, managed, maintained and financed • Privately owned and financed, but managed and maintained by local authority • Housing association owned, managed, maintained and financed

PwC

PRS: New Investment Models December 2012 Slide 25

The local authority’s role in increasing appeal to private investors • Contribute land today, deferring consideration • The way planning permissions and obligations are determined • Providing guarantees around rents and voids (income) • Preparing sites • Supporting broader regeneration

PwC

PRS: New Investment Models December 2012 Slide 26

Managing risk • Determining the best way to deliver the project (level of involvement, delivery vehicle, contracting structure) • Appropriate return for any risks taken or commitments made • Understanding potential development value and financial modelling to support viability calculations • Holding focussed competitions to appoint developer/funder/partner • Testing the financing market • Ensuing local authority's value is protected in case of failure • Exit route

PwC

PRS: New Investment Models December 2012 Slide 27

Contact John Webber 020 7213 5902 john.webber@uk.pwc.com

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Agenda 08.00

Arrivals – breakfast served

08.25

Welcome – Richard Parker, Partner, PwC

08.30

Chair’s introduction – David Lunts, GLA & Future of London

08.40

Speaker panel: Harvey Griffiths, Chief Executive, HIF Group David Montague, Chief Executive, L&Q London Housing Association John Webber, Associate Director, Corporate Finance, PwC

09.20

Questions to panel and discussion

09.55

Chair’s summing up

10.00

Coffee and networking

10.15

Close.

The Future of the Private Rented Sector PwC

December 2012 Slide 29