Future of the Private Rented Sector: New Investment Models

The Future of the PrivateRented Sector

New Investment ModelsDecember 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

PwC


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.

Slide 2December 2012The Future of the Private Rented Sector

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PwC






10.15 Close.


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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

66

• 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

Housing Investment Funds (‘HIF’)

7

• 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))

PRS investment overview

14

16

• 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)

2.0

8

88

0

2

4

6

8

10

12

14

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

08

-09

20

09

-10

20

10

-11

Owner Occupiers Social Renters private renters

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

-0.5

0.0

0.5

1.0

1.5

owneroccupiers

socialrenters

privaterenters

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

Permanent dwellings completedGross mortgage lending 2007 – Q1 2012

100%

120%

100

120

200,000

250,000

9

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

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

0%

20%

40%

60%

80%

100%

0

20

40

60

80

100

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

Q3

'10

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Gross mortgage lending £bn (LHS) % of peak (RHS)

0

50,000

100,000

150,000

200,000

1990-9

1

1991-9

2

1992-9

3

1993-9

4

1994-9

5

1995-9

6

1996-9

7

1997-9

8

1998-9

9

1999-0

0

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

Supply and demand

No of properties owned by private landlords

• 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

• 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

10

Graph source: Private Landlords Survey 2010Graph source: Private Landlords Survey 2010

89%5%

6%

Private individuals

Companies

Other organisations

78%

17%

3%1% 1% 0%

1 only2 - 45 -910 - 2425 - 100more than 100

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

11

The barriers to institutional investment into PRS- Montague Report

• Review of the barriers to institutional investment in private rented homes

• Barriers

• Rent controls

• Restrictions on gaining VP

• Planning constraints

• Recommendations

• Planning support

• Release of public sector land

• Funding support

12

• Low net (cash) yields

• Management risk

• Reputational risk

• Need for a PRS governing body

• Government task force to act as

enabler of PRS

• Quality standard / branding to

distinguish the product

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

13

• Sales prices subdued

• Developer lending heavily constrained

• Developer equity requirements are high

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

14

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

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

15

• RPs and LAs to manage, maintain, control and regulate stock, tenants and

tenures

• Property offering and differentiation is critical to attract right tenants

• 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

Institutional investment

16

• 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

Contact

17

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

PwC Slide 19December 2012The Future of the Private Rented Sector

John WebberSocial Infrastructure, Corporate Finance, PwC

PwC Slide 20December 2012The Future of the Private Rented Sector

Contents

1. Current investment in private rented sector

2. Barriers to private sector investment

3. Financing options

4. Example delivery models

5. Potential local authority role

PwC

6. Managing risk

December 2012

PRS: New Investment Models

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 Slide 22December 2012


Barriers to private sector to investment in thesector• 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 capitalgains are included

• Lack of investment track record to show to investors

PwC Slide 23December 2012


Types of financing

• Prudential borrowing

• Private placement or markets bond issue

• Bank finance

• Asset backed finance (institutional finance)

• Private equity finance

PwC

• Government loan guarantee scheme

December 2012Slide 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 localauthority

• Housing association owned, managed, maintained and financed

PwCDecember 2012

Slide 25


The local authority’s role in increasing appeal toprivate 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

PwCDecember 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 modellingto support viability calculations

• Holding focussed competitions to appoint developer/funder/partner

PwC

• 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

December 2012Slide 27


John Webber020 7213 [email protected]

Contact

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© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is amember firm of PricewaterhouseCoopers International Limited, each member firm of which is aseparate legal entity.

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Future of the Private Rented Sector: New Investment Models