Conference: 6 November 2014 #estaterenewal
Lucy Owen, Head of Area (South), GLA Yinka Bolaji, Director, Portfolio Management, Genesis Jonathan Clarke, Partner, Centrus Advisors Andrew Sivess, Group Manager, Innovation & Funding, LB Barking & Dagenham
FUNDING ESTATE RENEWAL Andrew Sivess LB Barking & Dagenham
Interest rates – window of opportunity 7.0 UK: short-‐term Euro area: short-‐term
UK: long-‐term 5.0 Euro area: long-‐term 4.0
0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Informa)on taken from OECD Economic Outlook and Methods
CURRENT MARKET Current lending into UK Real Estate (£bns)
Spread on three-‐year retail bonds(c)
Spread on ﬁve-‐year retail bonds(c)
0.60 Source: Bank of England
-‐10.0 -‐15.0 Source: Bank of England
Source: Bank of England
COMPETITION FOR INVESTMENT OPPORTUNITIES • Reduced bank lending and risk aversion has led to increased compe))on for investment projects • Not enough investment grade opportuni)es with asset liability matching requirements • Investment is a compara)ve NOT absolute assessment • To be an a[rac)ve investment you must understand the needs of your target investor community and adapt the investment proposi)on accordingly • Equally you must understand what you want from your investors
FUNDING & INVESTOR REQUIREMENTS FUNDING SOURCES
HIGH QUALITY PROJECT
Robustness Accountability Certainty
EIB (GAP FUNDING)
Risk Adjusted Return Blended rate
EUROPEAN INVESTMENT BANK KEY REQUIREMENTS
50% MAX. OF ELEGIBLE FUNDING COSTS
TRIPLE AAA/ BORROWER COVENANT
SOCIAL & ECONOMIC INFRASTRUCTURE
25 YEAR TERM TYPICAL
IDEAL INVESTMENTS CHARACTERISTICS
• Long dura)on
• Self ﬁnancing project
• Liability matching
• Investment grade guarantee
• Direct access to funders
• Inﬂa)on linked • Asset backed
• Avoiding excessive leverage • Retain equity upside
• Low vola)lity • Yielding • Low market correla)on
• Prudent life-‐cycle and estate management
• Realis)c risk alloca)on
PROMOTOR ROLE (THE COUNCIL) Other organisation (if required)
LBBD Private funder
Issues • Investment objec)ves • Funding route(s)
SPV Development Agreement
ASTs with Tenants
• Taxa)on • Governance • Risk alloca)on
STAKEHOLDER OBJECTIVES -‐ SUMMARY
Local Authority objectives / solutions!
Funding Partner objectives / solutions!
Retain full ownership of land and assets"
Structured as Amortising Finance Strip, no reversionary interest"
Retain all management and nomination"
No day to day controls wanted / required"
Ability to sell assets"
Fund structure from varying rents from 50% OMR to 80%"
Project scope and costs managed to ensure affordability in light of rent aspirations"
Flexibility to offset finance risk by altering rents on a discretionary basis"
Private Affordable Rent solution meaning limited security of tenure and ability to increase rents to 100% market"
Retention of all profits rents by providing LA guarantee ʻwrapʼ "
Fixed finance cost, no participation in outperformance"
Nil cash funding requirement"
Funding 100% of all project costs from Financial Close, against certificates "
Parent company funding guarantee"
END PRODUCT • " • " • " • " • • " • " • " • " •
A total of 477 affordable housing units on two sites" 311 terraced family houses with gardens" 166 apartments spread over low density blocks and a 10 story tower" Driven by LBBDʼs specific requirements" Scheme caters for families and young workers" Efficient construction & delivery maximised affordability" Built to Code Level 4 and designed to last over 125 years" Systems emit fewer emissions, less waste and reduce water consumption" Mayoral size standard " Sense of community, environment and place "
Portfolio Management approach to regeneration
Yinka Bolaji Portfolio Management Director Genesis HA
Genesis Property PorYolio • Porcolio comprises of 33,000 proper)es. 27,000 owned & remainder managed on behalf of other landlords • Work in 88 local authori)es. • 50% of Genesis ac)vity is located within 5 local authori)es. • 14 addi)onal local authori)es cover 30% of porcolio.
Genesis Property PorYolio and tenures As at 31st March 2014
Porcolio comprises of 33,000 proper)es. 27,000 owned & remainder managed on behalf of other landlords
Genesis property porYolio and neighbourhoods
Signiﬁcant propor)on of porcolio are in deprived neighbourhoods. We con)nue to support the regenera)on of communi)es in key markets
IMD Decile (where 1 is most deprived)
Drivers of value – travel [me and quality of place 120 Average Flat Value
Plotting over 4,000 locations in London, we can see there is a clear relationship between value, travel time and quality of place. Based on the relationships between value, travel time and quality of place we have identified, we can ask: How can we create more value? • Through regeneration and gentrification • Through decreasing travel time via transport improvements
Source: TFL, ONS, HM Land Registry, Savills
40 IMD Score
For reference, the average one way commute in London is 38mins. We have just looked at apartment values to correct for diﬀerences in property type and size.
Beber places & beber opportuni[es for residents • Mixed tenures and mixed income residents create stronger communi)es and help improve and regenerate areas of depriva)on. • Mixed tenures and mixed income communi)es a[ract other investment, par)cularly from retail and other businesses, which help in the crea)on of thriving neighbourhoods • Strong social and economic wellbeing programmes help residents take advantage of opportuni)es created by the improvement and regenera)on of those areas • In the long term, strong communi)es result in improved asset values enabling Genesis to further its objec)ves
Crea[ng Value – Major regenera[on projects
Mildmay Hospital, Shoreditch Stoke Quay, Ipswich
Grahame Park, Barnet
Woodberry Down, Hackney
Zenith House, Barnet
City West Park, Chelmsford
Funding implica[ons – illustra[ve developments
Cummula[ve development cashﬂow
10 0 -‐10 -‐20 -‐30 -‐40 -‐50 -‐60
Years Private developer
Leveraging assets – Genesis recent ac[vi[es Recycling latent value within the exis)ng porcolio, 1 & 2 bedroom proper)es are appraised as they become vacant and subsequently recommended for disposals. Void disposal ac[vity
Sales value achieved (millions)
Development spend (millions)
New dwellings completed
Aﬀordable comple)ons %age
Void disposals sold
80% of disposals in Westminster and Brent, hence ongoing dialogues with local authority on impact of disposals. HCA general consent obtained in January 2013 and due to expire in March 2015.
Leveraging assets – poten[al approach Key: OMV (£)
Core Boroughs (LIF) Exit Boroughs (E)
£750,000 £500,000 £400,000 Core Estate
REGENERATION Retain (Regen/Refurb)
Retain (No ac[on) NPV (£)
Linking asset leverage to our neighbourhoods – Westminster example
Estate Renewal Funding op[ons Jonathan Clarke Partner, Centrus Advisors LLP 6th November 2014
Centrus Advisors LLP is authorised and regulated by the Financial Conduct Authority
TREASURY & DERIVATIVES
D E B T A D V CONFIDENTIAL I S O R Y ⎢ P R O J E C T F I N A N C E
• • • • •
Cash ﬂows and risk Who provides equity? Scope for improvement Key points for a sponsor LA / RP Q&A
Slide 24 CONFIDENTIAL
Cash ﬂows and risk Indica)ve "regenera)on" cash ﬂows (cumula)ve) 100
Land / CPO
Funding challenges: (i) uncertainty what will happen, (ii) uncertainty when it will happen, (iii) uncertainty how much it will cost / realise in sales
Slide 25 CONFIDENTIAL
Cash ﬂows and risk Investment types
Estate renewal component parts Land & CPO
Mostly equity or “equity”
Mostly equity or “equity”
Debt more available Non-‐estate renewal comparisons
Small-‐scale property development
Mix of debt and equity
Mix of debt and equity
Commercial property w/ covenant
More debt / cheaper equity
Housing associa)on rental ac)vi)es
Highly geared with debt
Slide 26 CONFIDENTIAL
Who provides equity? Once enough visibility to seek debt funding the problem is largely solved. Providers of equity:
– Investor with long )me horizons and interest in funding residen)al development and without simpler / be[er op)ons Ø Not many of these, but they exist for the right schemes – Housing associa)on Ø Charitable objecCves, so able to balance prioriCes Ø Development risk needs managing within wider corporate context – the “one big bucket” approach has its limitaCons – Local authority Ø Right objecCves Ø QuesCon about experCse and independence ‒ Homes and Communi)es Agency Ø Right objecCves Ø Ability to invest ﬂexibly and on sub-‐market basis
Slide 27 CONFIDENTIAL
Scope for improvement Party
Could do more if …
… but …
More of them, more Pension funds conserva)ve and focussed on of a range commercial property.
Struggling with PRS (yield, delivery) although interested in RP lending and leasing. Housing associa)ons
Need to be mindful of ﬁnancial strength and many uncertain)es ahead.
The established model, in terms of level of gearing, under heavy pressure. May need new vehicles to work at higher risk levels. Local authori)es
HRA cap raised?
If want to act as investor, can already do so outside the HRA if desire is there. Constraint is more about role and skills.
The “investment” rather than “grant-‐giving” perspec)ve is a posi)ve development, even if started partly out of necessity. But some)mes s)ll will have to be very “sot” funding.
Slide 28 CONFIDENTIAL
Key points for a sponsor local authority / registered provider Commercial • Go to the market with a big oﬀering if that is needed to see value • Recognise ﬁnancial limita)ons of exis)ng structures, whether HRA or RP balance sheet and risk appe)te • Control risks for funders as far as you can • Oﬀer upside but put in place robust framework for sharing it • Don’t give away strategic control if not the right partner for that, either in terms of mo)va)ons or delivery capability Governance • Consult … make a plan … then have courage in your convic)ons • Keep board / key stakeholders on-‐side • Invest in eﬀec)ve project team and support • Recognise the nature of the rela)onship with delivery partners and never lose sight of it Client Logo
Slide 29 CONFIDENTIAL
Conference: 6 November 2014 #estaterenewal