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Market starts to understand PRS development valuation

Andrew Yates, commercial real estate partner at Berwin Leighton Peisner, says the private rented sector is maturing, though there is still a short of stock for investors.

Yates says valuation, taxation and planning are all issues that those active in the sector are wrestling with, in a bid to establish a profitable model for development of homes for rent around the UK. While the market started in London, he now sees other locations in the UK providing attractive opportunities for those looking to build for long term rental.

“The market’s getting more used to whats going on in the sector. Ttinking is evolving and clarifying around how you value these assets, how you value a PRS block. That’s involving more approaches to valuation which are more like valuing a business than just an empty apartment.”

Speaking in an interview that can be viewed online at BLP’s website, he also notes that tax issues need careful planning, to maximise incomes in what can be tight margin business. And negotiations with local planners are also carefully finessed: “People again are getting used to the idea of what’s going on in planning, and dealing local planning authorities and negotiating better terms; often tied up with restrictive terms use covenants that mean you get a preferential deal on planning, but you have to commit to leaving the asset only available for PRS for a minimum number of years.”

Yates also notes that residential developers – and some of the traditional housebuilders – are now getting their heads around the opportunities that PRS presents. “One of the benefits is that by building a PRS block,, they can  sell it in one go, they can sell several hundred apartments in one transaction, and they they can move onto the next development. What they don’t have to do is plan for the slower release of apartments on an individual sale basis, so hopefully more homes get built much more quickly.”

One recent deal that illustrates the last point is the recent sale by Crest Nicholson of homes at its Bath development. There, investor M&G has paid £25.2m for a block purchase of homes for long term private rental. The pair are hoping to conclude similar deals at other development sites around the UK.

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Call for planning changes to support private rental

Ryan Prince, CEO at Realstar Living, has renewed calls for a change in the planning system, to support the development of dedicated private rented sector homes. Until such change happens, he insists the economics of development means not enough homes for rent will get built.

Prince says the private rented sector could probably add around 500,000 homes right away, and if rents were in the range of up to £1,000 per month, they would be full immediately. “So, why don’t we have it today? The answer is planning policy.”

Writing in Property Week magazine, he argues: “At present, the planning system is geared towards ‘private for sale’ (expensive) or ‘affordable’ (council housing for those in dire need). There is nothing of note for the independents in the middle.”

These “independents”, also called the “squeezed middle” by affordable home developer Pocket, are people in regular jobs, who in London can typically be earning between £25,000 and £45,000 a year. Working on the rule of thumb that no-one should be paying more than one third of their gross income in rent means, says Prince, a practical maximum of £1,000 rent per month.

With rental home builders such as Realstar fighting for development sites against housebuilders constructing for sale, there is little opportunity to buy land at a price that makes financial sense to build for these mid market renters.

Prince says his company does have one 225 unit apartment block in Stockwell, south London, that fits this description of “indy” housing. The block is full, at rents of around £250 per week. But he says he was only able to win the site “because of a quirk of history” that meant it had a sui generis flexible planning use – meaning no housebuilders could grab it.

The solution, says Prince, is for London’s next mayor to amend the planning system, either creating a definitive new use class for rental housing, or varying the current rules. He also wants to rename rental homes as “indy housing”, in place of PRS.

New Bailey development, Manchester

L&G invests £16m in Manchester PRS development

Legal & General has forward funded a development of 90 apartments for rent in central Manchester. The 10 storey block will be part of the New Bailey mixed use development, which English Cities Fund and Muse Developments is promoting on a site behind Spinningfields.

L&G won the £16 million project after open market bidding. The site already has planning permission, though some design revisions are now likely to make it better suited to long term rental block management. The scheme designed by architects AHR could start on site this autumn, with the potential for tenants to be moving in to the mix of one, two and three bed apartments before the end of 2016.

“The renaissance of Salford is one of the best success stories in UK urban regeneration,” said L&G’s director of direct investments, Laura Mason. “Situated in a waterside location, within walking distance of Manchester Piccadilly and 200m from Salford Central, we have the ability to provide a new class of rental accommodation, based off fair value rents but with a higher quality offer, and greater tenant service and flexibility.”

This is L&G’s second private rented sector investment, as the company recently took on a regeneration site in Walthamstow, east London where permission has been granted for more than 300 flats. The investor has said it will put up to £1 billion into rental homes over the long term, and is seeking an investment partner “with like-minded international capital” to grow what it expects to be a significant portfolio of private rented homes across the UK.

 

Proposals for the new Brent Cross development

Argent and US developer Related head into UK rental market

Established British development company and US developer Related have formed a joint venture to tackle major mixed use projects in the UK. The pair, working under the brand Argent Related, will be looking to grow a rented housing element to schemes they involve themselves in, drawing on Related’s US experience, where the company has more than 50,000 homes for rent.

Together, the two partners will pursue large schemes, building on Argent’s experience of creating urban spaces around the UK in locations including King’s Cross and Birmingham. “Related’s industry leadership in such areas as sustainability and construction supply chain, and expertise in developing and operating their portfolio of more than 50,000 build-to-rent homes in the US, will enable us jointly to deliver a significant contribution towards the homes London and the UK desperately needs,” said Argent managing director David Partridge. “Together we will be able to complete projects with the scale and impact to make a real difference, and keep Argent at the forefront of the UK property sector.”

The joint venture has already been selected by Barnet Council to deliver a substantial mixed use development on a 192 acre site south of Brent Cross Shopping Centre in north London. The pair expect to start work on the project in 2017, using a masterplan already prepared by architects Allies + Morrison; the site already has a planning permission for around 7,500 homes, 350,000 sq ft of retail space and 4.2 million sq ft of commercial space.

Residential property will be a key part of the pair’s interests – as the launch statement made clear: “Argent Related will develop open-market and affordable housing, offices, retail and leisure space, and hotels, with a commitment to sustainable and sensitive development. Drawing on Related’s extensive experience in build-to-rent developments and strong management capability in the United States, the venture will place a distinct focus on purpose-built rented homes, where the company sees great opportunity in the market.”

A flavour of what is to come can be gleaned from a visit to the Related Rentals website, where the company leases a range of luxury apartments and offers tenants a wide variety of supporting services.

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Sigma expands £1 billion PRS finance

Urban regeneration specialist Sigma has expanded its arrangement with Gatehouse Bank, to finance its expanding rental homes portfolio. Gatehouse will now support Sigma towards a larger target of 10,000 rental homes, to be developed over the next five years.

Sigma, which is listed on the AIM junior stock market, is already under way with a first phase of homes across Merseyside and Greater Manchester, investing around £106 million. A quarter of the planned 927 homes are already built or under way, with the first tenants having moved in to their homes in February 2015.

Sigma is working with Countryside Properties to deliver the homes, and is working with Direct Lettings (part of Shepherd Direct and linked to the Century 21 estate agency chain) to arrange rentals. It has also created DifRent, a lettings brand as its customer facing name.

“This is a significant moment for Sigma, which brings to fruition the work we have done with our local authority partners, Gatehouse Bank, Countryside and Shepherd Direct to establish our Private Rented Sector model,” said Sigma chief executive Graham Barnet.

“I would like to express our thanks to all our partners for their support. We see considerable potential to create one of the largest new build privately rented residential portfolios in the UK and I am delighted that construction of the first phase of over 900 new homes for rent across Greater Manchester and Liverpool is now starting.”
“We believe the joint venture with Gatehouse and our new partnership with Grainger plc firmly establishes blueprints for further large scale housing programmes across cities throughout England with other partners and additional local authorities.”

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British Land plans rental homes in Ealing

Landlord British Land will create 55 apartments for rent, as part of its makeover of the Ealing Broadway shopping centre. The flats will be converted from redundant office space at 54 Ealing Broadway, while adjacent offices and shops will be improved as part of the project.

Unusually for a commercial property company, British Land has committed to becoming a long term residential landlord. Its proposals state: “We will own and manage homes for rent, accommodated above the shops and in two additional floors on top of the existing building. These homes will help address local rented housing needs, provide a variety of homes for town-centre residents; and continue to be owned by British Land, which will be responsible for their up keep and condition.” As well as the additional floors, Crystal House will also be reclad in brick, removing the dated mirror glazing currently on the site.

British Land’s decision to convert offices in Ealing to flats for rent is not unique. Schemes at 64 Broadway and 16-20 New Broadway have recently sought similar conversions. The area is something of a residential development hot spot, with upcoming rail connectivity improvements via Crossrail, and nearby Berkeley Homes is building its Dickens Yard development with apartments for sale.

The company has spent the last few years gaining full ownership of the shopping centre development and its connected buildings, buying in separate ownerships to assemble the site.

 

 

French PRS market sees listing

A landlord that owns more than 7,000 homes in France is to list on the stock market there. The move will raise EUR370 million for Powerhouse Habitat, allowing for further growth of the company’s EUR1.2 billion portfolio.

The move is the first step in a process of creating a tax efficient Reit (or real estate investment trust) and will create France’s first listed residential landlord. Some are suggesting the French market will now follow that of Germany and France, with increasing institutional investment in the residential housing market.

Powerhouse Habitat is owned by parent company TwentyTwo Real Estate, which was established in 2013 to invest in a variety of property sectors. To date, it has focused on France, but is now looking at other European opportunities. The initial Powerhouse Habitat rented property portfolio contains 7,140 homes across France, which are all rented to energy company EDF, for subletting to workers at its power plants.

 

 

Bath Riverside

M&G backs PRS development in Bath

Investor M&G Real Estate has agreed to buy 97 new build homes in Bath from developer Crest Nicholson, to create a core of private rented homes in the city.

The block purchase at the Bath Riverside development will cost M&G £25.2 million, for a mix of one and two bed apartments. It is intended that the deal will be the first of several between M&G and Crest Nicholson, allowing the investor to build a PRS portfolio, which Crest Nicholson will build. The homes are expected to start appearing on the rental market from February 2016.

“We look forward to working with Crest Nicholson on other schemes,” said Alex Greaves, head of residential investment at M&G. “We believe this to be the first transaction of its kind between an institutional investor and a listed house builder, marking a major opportunity for institutional investors seeking access to the UK residential sector. Our residential strategy provides stable, income-driven returns for investors and, in time, thousands of much-needed, well-managed rental properties.

“As we build on this initial agreement to bring scale to our portfolio of rental properties, it’s vital we continue to champion quality. It is our hope that the involvement of institutions like ours will lead to more homes coming on tap and higher standards, just as it has done with the student accommodation market. We want our residents to be proud renters because we and our partners have developed high-quality homes.”

Chris Tinker, executive board member for Crest Nicholson, added: “This is an exciting development in Crest Nicholson’s drive to explore new models of housing delivery across the southern half of the UK. With housing at the forefront of the political agenda, an institutionally funded private rented model has the potential to underpin a meaningful increase in housing output at a time when the need to sustain growth and meet housing need is at an all-time high.

“This type of partnership agreement could mark a step change and acceleration in the PRS model which will ultimately help unlock land, create jobs and bring wider economic benefit as well as bringing forward the delivery of much needed new homes and mixed tenure communities.”

While housebuilders typically argue they can make more money from building homes for sale, private rented sector components can be attractive as part of a larger site development. They enable the housebuilder to gain construction pace more quickly, thus completing a project faster; and can also prove beneficial in negotiating with planners, who sometimes look more favourably on PRS units, and may consider offsetting part of an affordable housing quota against the rental units.

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Patrizia bags Manchester PRS prize

German investor Patrizia has secured a major private rented sector site in Manchester, with the acquisition of the First Street development in the city.

The deal involves Patrizia buying a 20 acre development site from Ask Developments. First Street includes a mix of sites for development, along with some completed elements. Of most interest to the company will be the project’s residential element, which will see Patrizia build around 500 apartments for long term private sector rental.

The masterplan for the site has already been granted approval for up to 1 million sq ft of commercial space, as well as the residential element. A first phase has recently been completed, containing a hotel, offices, arts centre, student accommodation and retail. Shop and restaurant operators including Sainsburys and Pizza Express have already committed to units in the scheme.

Developer Ask Property Developments has developed the project to date in association with Manchester City Council, and will remain with the project as development manager. Resimarketnews understands Patrizia has been trying to close the deal on the site for around 18 months.

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The First Street portfolio includes One First Street, a completed 180,000 sq ft office development that has occupiers including Ford, Autotrader and Jacobs Engineering. The occupiers have leases with an average nine years to run, and Patrizia is expected to sell this building to a pension fund or similar institutional occupier.

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Also included in the sale is a new hotel. The 208 room property, which is just being completed, will open under the Innside brand, operated by Spanish hotel group Melia. The hotel is scheduled to open in late 2015, and will be the first under the Innside brand in the UK. The brand was launched in Germany, and is set to open in key cities internationally over the next few years.

“With this investment, our property assets under management in the UK now amount to more than a billion pounds,” said James Muir, managing director of Patrizia UK. “Driven by attractive economic and demographic fundamentals in Manchester, and the growing trend for urbanisation, we are anticipating strong demand for this centrally located, high-quality accommodation which will be tailored to the private rental sector. Together with the new commercial buildings we expect to create an attractive investment opportunity for institutional investors. We see this project as an ideal first investment for our planned Patrizia UK PRS Fund.”

Patrizia has residential and commercial holdings in Germany, where it is a major residential landlord with a pipeline of around 4,000 homes. In the UK, it has built a commercial property portfolio and has long declared itself prepared to invest to build a substantial position in the UK’s private rented sector.

Angel Gardens will include a 36 storey tower

Moda finds private rented funding with Apache

Private rented sector developer Moda Living has agreed a joint venture with a Middle Eastern funder that will allow it to start building apartments for rent in Manchester and Leeds.

Funding from Apache Capital Partners has been agreed for a potential £1 billion joint venture, kicking off with Moda’s 458 apartments at its Angel Gardens development in Manchester which has backing of £130 million from Apache.

Moda is a joint venture between Caddick Developments and Generate Land, and the pair are assembling a pipeline of projects around the UK to build further rental apartments. These include:
• Vauxhall Sky Gardens which will create 240 apartments in London, for completion in 2017
• Liverpool Waters with 325 flats in a 40 storey tower, due to complete in late 2017
• Quarry Hill and City One in Leeds, with the potential for more than 1,900 apartments.

The pair are already talking about building scale, before considering an exit possibly via a Reit, or an IPO on the stock market.

More on Moda here.