Page 1

Conference: 6 November 2014 #estaterenewal

B:

Funding

Chair Panel:

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  

6.0    

UK: long-­‐term   5.0       Euro  area:  long-­‐term   4.0      

3.0    

2.0    

1.0    

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)  

Bond spreads  

25.0

1.80 1.60  

20.0

Spread on   three-­‐year   retail   bonds(c)  

1.40 15.0  

1.20 1.00  

10.0

Spread on   five-­‐year   retail   bonds(c)  

0.80 5.0  

Jun-­‐14

Jan-­‐14

Aug-­‐13

Mar-­‐13

Oct-­‐12

May-­‐12

Dec-­‐11

Jul-­‐11

Feb-­‐11

Sep-­‐10

Apr-­‐10

Nov-­‐09

Jun-­‐09

Jan-­‐09

Aug-­‐08

-­‐5.0

0.40 Mar-­‐08  

0.0

0.60 Source:  Bank  of  England  

0.20 0.00  

-­‐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    

INVESTMENT-­‐LED MODEL  


FUNDING & INVESTOR REQUIREMENTS FUNDING SOURCES    

HIGH QUALITY  PROJECT    

PENSION FUND  

 

SOVERIGN WEALTH  

 

INSTITUTIONAL

 

Robustness   Accountability   Certainty    

EIB (GAP  FUNDING)  

 

Alignment  

HIGH NETWORTHS  

Efficiency

Partnership Structure  

Risk Adjusted   Return     Blended   rate  


EUROPEAN INVESTMENT BANK KEY REQUIREMENTS    

ELEGIBLE INVESTMENTS  

 

FUNDING  LEVEL  

 

50% MAX.  OF  ELEGIBLE  FUNDING  COSTS  

 

INVESTMENT GRADE  

TRIPLE AAA/  BORROWER  COVENANT    

SOCIAL &  ECONOMIC  INFRASTRUCTURE  

TERM  

25  YEAR  TERM  TYPICAL  


IDEAL INVESTMENTS CHARACTERISTICS

ROBUSTNESS

PROMOTER

•  Long dura)on  

•  Self financing  project  

•  Certainty

•  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

Loan

 

Issues •  Investment   objec)ves     •  Funding  route(s)  

Grant Lease

SPV Development Agreement

Loan

Development Partner

PMA

Property Manager

ASTs with Tenants

•  Taxa)on   •  Governance   •  Risk  alloca)on    

Tenants


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"

Substitution rights"

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 "

Funding assurances"

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  

Genesis Proper[es  

Significant propor)on  of  porcolio  are  in  deprived  neighbourhoods.  We  con)nue   to  support  the  regenera)on  of  communi)es  in  key  markets  

1

2

3

4

5

6

IMD Decile  (where  1  is  most  deprived)  

7

8

9

10


Drivers of  value  –  travel  [me  and  quality  of  place   120 Average Flat Value

Regenera)on Gentrifica)on  

100

80

Travel Time

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

Transport Improvements  

60

40

PCL

20

0 0

10

20

Less Deprived  

Source: TFL, ONS, HM Land Registry, Savills

30

40 IMD Score

50

60

70

More Deprived  

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  

Housing Associa)on  

Regenera)on


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  

11/12

12/13

13/14  

TOTALS

129

112

104

345

Sales value  achieved  (millions)  

£28.8

£31.3

£30.8

£90.9

Development spend  (millions)  

£110.3

£119.1

£146.7

£376.1

New dwellings  completed  

1,018

1,041

751

2,810

Affordable comple)ons  %age  

86%

64%

39%

66%

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)  

Leverage assets  

£1m

£750,000 £500,000   £400,000   Core  Estate  

REGENERATION Retain  (Regen/Refurb)  

REFURBISMENT

Retain (No  ac[on)   NPV  (£)  

£10,000


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  

Client Logo  

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

⎢

CORPORATE FINANCE


Contents  

•  •  •  •  • 

Cash flows  and  risk   Who  provides  equity?   Scope  for  improvement   Key  points  for  a  sponsor  LA  /  RP   Q&A  

Client Logo  

Slide 24   CONFIDENTIAL  


Cash flows  and  risk   Indica)ve  "regenera)on"  cash  flows  (cumula)ve)    100    

50    

-­‐        

£m

1

2

3

4

5

6

7

8

9

10

-­‐50  

-­‐100  

-­‐150  

-­‐200  

Land /  CPO  

Infrastructure

Construc)on

Sales (private)  

Sales (affordable)  

Regenera)on total  

Planning milestone  

Funding challenges:  (i)  uncertainty  what  will  happen,  (ii)  uncertainty  when  it  will   happen,  (iii)  uncertainty  how  much  it  will  cost  /  realise  in  sales  

Client Logo  

Slide 25   CONFIDENTIAL  


Cash flows  and  risk   Investment  types  

Riskiness

Funding op[ons  

Estate renewal  component  parts   Land  &  CPO  

Mostly equity  or  “equity”  

Infrastructure

Mostly equity  or  “equity”  

Construc)on

Debt more  available   Non-­‐estate  renewal  comparisons  

Small-­‐scale property  development  

Mix of  debt  and  equity  

Commercial property  

Mix of  debt  and  equity  

Commercial property  w/  covenant  

More debt  /  cheaper   equity  

Housing associa)on  rental   ac)vi)es  

Highly geared  with  debt  

Client Logo  

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  

Client Logo  

Slide 27   CONFIDENTIAL  


Scope for  improvement   Party  

Could do  more  if  …  

… but  …  

Investors

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  

More ambi)ous?  

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.  

HCA

More money?  

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.  

Client Logo  

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  


Q&A

Client Logo  

30 CONFIDENTIAL  


Conference: 6 November 2014 #estaterenewal

Questions? Â

Delivering Estate Renewal: Funding breakout  

Part of Future of London's conference on 6 November 2014.

Read more
Read more
Similar to
Popular now
Just for you