Monthly Archives: June 2014

Abu Dhabi funds to transform Manchester with private rented project

Abu Dhabi United Group, which owns Manchester City football club, is to back a £1 billion project to deliver up to 6,000 new homes in central southern Manchester.

The deal is set to leapfrog efforts by other local authorities, and by the mayor of London, to encourage housing development and the growth of a professional private rented sector. While talk in London is now of a talent drain, as workers cannot find affordable places to live, Manchester looks set to deliver.

A partnership with the city council will see an initial phase of more than 830 private rented homes delivered in the Ancoats and New Islington areas, close to the Etihad stadium. The 10 year deal under the name Manchester Life aims to deliver more than 6,000 new homes.

“The planned transformation of the eastern edge of the city centre is the single biggest residential investment Manchester has seen for a generation,” said council leader Richard Leese. “Building thousands of quality new homes will be a fundamental part of our growth story, and will deliver significant socioeconomic impact.”

According to the Manchester Evening News, the deal is significant for the inroads it makes into the city council’s housing development goal; and as a great example of public-private partnership with a major investment.  “Most of homes will be aimed at the 25-39 year old young professionals,” says the publication, “who may struggle to get on the property ladder but are eager to live on the fringes of the city in private rented accommodation.”

Construction on the new homes could start early next year.

Survey shows councils still unaware of demand for private rented sector developments

Many politicians are still blind to the importance of the private rented sector, and its relevance to those looking for a home. Just 2% of councillors surveyed put PRS top of their perceived priorities for improving the supply of housing.

The disappointing result comes from research carried out by the Smith Institute on behalf of housing provider Places for People. The study asked councillors and officials for their views on a variety of issues around housing, and discovered that while 60% thought owner occupied properties were the top priority, and 38% placed social housing top, just 2% perceived the private rented sector as needing top priority.

“Despite local authorities’ best efforts, clear appetite from investors, and strong emphasis from central government, this work shows us that more needs to be done to make it happen,” said David Cowans, chief executive of Places for People. “Councils have a key role to play in using their planning and economic growth levers to create the right environment to attract investment into this vital sector and drive up standards for tenants.”

A few local authorities are the exception, understanding the importance of PRS and taking a proactive stance. These include Birmingham which is planning to develop its own private rented sector homes, and Wandsworth which has recently approved plans for a major residential scheme with a substantial private rented element.

Paul Hackett from the Smith Institute, which carried out the research, summarised the issues raised. “Our survey shows that councils are cautious about the PRS. They want to improve the security of tenancies and housing quality, but struggle to regulate the PRS in their areas. The government needs to do more to help councils lift the quality bar across the sector.”

While just 51% of councillors thought their local plan actively supported the private rented sector, two thirds were in favour of relaxing section 106 agreements, to favour projects with a significant proportion of PRS homes.

Pension funds begin move into PRS after a slow start

Dithering insurance companies have already missed out on some of the cream in the London residential rented sector. That’s the accusation from Peter Bill, property columnist in the London Standard, after he pored over the week’s 2013 results from housing developer Berkeley Homes.

Bill notes that Berkeley started the year with 729 rental homes on its books, and has subsequently sold 675 of them, for a profit of £40 million. [For some residential developers, newly completed units were held back for rental where they proved difficult to sell, at a price that would book a profit; the legacy of overpaying for development land in the boom times]

Of the total sold, 534 were apparently sold to M&G Investments, which paid Berkeley £105 million for the portfolio in June 2013. The deal would have booked Berkeley close to £30 million in profit.

“That profit could have been gifted to policyholders, if M&G had acted a few years ago,” says Bill.

However, insurance companies remain inherently risk averse, and with good reason – they’re looking after your pension pot. Anne Kavanagh, global head of asset management at AXA Real Estate, told an audience at last week’s London Real Estate Forum that her company was happy to invest in all sorts of real estate, and will lend to others in order that they can do so. But they absolutely will not lend on development projects – it’s still considered too risky.

However, M&G is now clearly playing catch-up, and has decided the private rented sector is something worth investing in. A report from Property Week suggests the company is about to agree the £45 million forward funding of a 152 rental apartment scheme in North Action. The Victoria Square development is being put together by Hub Residential and features 16 and 10 storey towers. Both this project, and the Berkeley properties, are being held within a UK Residential Fund, into which M&G intends to add further mid-market properties.

Wandsworth leads in promoting private rented homes

London borough Wandsworth has started delivering on a promise to provide more private rented sector homes. A planning permission granted this week for a site in Nine Elms includes 114 private rented apartments within a development of 510 homes, to be developed by housebuilder Bellway.

The redevelopment of the Christies Fine Arts warehouse site will include two blocks of apartments, one of which will include 72 affordable homes, plus the 114 units for rental at open market prices, to a restricted audience of tenants who will need to have a connection with the borough. There will also be the opportunity to sign longer leases of up to five years, while rent rises will also be moderated.

As well as the private rented homes, and the 72 affordable units provided on site, Bellway will contribute an additional £10 million towards the building of affordable housing elsewhere in the borough. A manager for the rental homes has yet to be appointed, but it is expected the open market and affordable homes will be handled by the same management organisation.

The project’s private rented homes are the first fruits of a promise made less than a year ago by the council. Last summer, Paul Ellis, the cabinet member for housing promised: “We want to do even more to support those living in the private rented sector by offering development incentives to boost the number of homes being built in Wandsworth for private rent, and in the process agree with developers that local people are given first refusal over the new housing.”

“We know that people sometimes feel they lack security in the private rented sector due to things like short-term tenancies or the possibility of unexpected rent hikes, and this can stop them from feeling like they can settle in a particular place. So, the council hopes to boost the confidence of those living in this sector by arranging with housing developers for local people to be offered tenancies for new homes built specifically for private renting that provide a greater degree of stability and security, with rents that are not subject to unexpected rises.”

The Christies scheme will see Bellway deliver rental homes as well as affordable units and flats for sale

The Christies scheme will see Bellway deliver rental homes as well as affordable units and flats for sale

“Under such an arrangement, the tenant could confidently call the borough home for the long-term.”

“In order to make this new approach to the creation of private rent homes attractive to the developer, the council plans to investigate whether developers could contribute a lower community infrastructure levy as an incentive to provide this type of housing.”

“Support will also be given to developers looking to build privately let properties in locations that traditionally suit such developments – such as town centres and near to transport links.”

“The possibility of introducing requirements that newly-built private rented housing is initially marketed to local residents with longer tenancy terms than the normal six months will also be explored through Section 106 agreements.”

The project will include a linear park and limited commercial and community space

The project will include a linear park and limited commercial and community space

Speaking this week, after the scheme was granted planning permission, committee chairman Sarah McDermott said: “The scheme provides some of Wandsworth’s first homes built specifically for the private rent sector. They will be reserved for local residents and offered on tenancies of up to five years to give more security than can usually be found on the open market.”

Wandsworth’s approach, using a negotiated planning settlement with private developers, is commendable in the speed with which it has been established in practice. It goes some way towards demands from private rented sector developers, such as Harry Downes of Fizzy Living, for the planning system to give the sector a helping hand to prevent the regular loss of sites to residential developers. Unless planning authorities intervene, he argued recently, then a private developer building for sale will always be able to outbid others, in London’s current “hot” residential market.

The use by Wandsworth of a restrictive covenant, limiting access to the homes to those living or working in the borough, on reasonable incomes, is also similar to approaches being taken by other authorities, in connection with organisations including Pocket and Dolphin Living. It is a model other local authorities would do well to check out.

Vancouver tempts rented housing providers to to deliver new supply

In an echo of the situation in the UK private rented sector marketplace, authorities in Vancouver and other Canadian municipalities are working out how to encourage the delivery of new homes for rental.

In contrast with the UK, the has a strong bedrock of private rental housing, which a range of government programmes helped to deliver in past years. However, as the subsidies and programmes dried up, so did those investors taking advantage of them. The result is too little supply in recent decades; and as Michael Geller points out in an article in the Vancouver Courier, in parts of Vancouver, “not one new purpose-built rental building has been constructed in over 40 years”.

Like the Brits, Canadians have traditionally dreamed of owning their own homes, he says: and as in the UK, this dream holds less allure for younger generations, for a variety of reasons. Interestingly, one fear in Canada is that rising prices cannot be sustained, making a home not such a great investment – this is encouraging older generations to rent, rather than buy.

Vancouver is “succeeding in its efforts to increase supply,” says Geller. The authorities are trying a range of incentives including density bonuses, parking reductions, reduced municipal fees and fast-tracking of applications.

Several of those active in the growth of the professional private rented sector have called for planning concessions to help encourage investment in the sector. If these strategies are working in Canada, are they worth considering here in the UK?

Ballymore offers major private rented sector opportunity

Residential developer Ballymore is seeking joint venture partners for three London sites, which could form a substantial new private rented sector portfolio. The three schemes within Project ACE are on the South Bank, at Canary Wharf and in the Leamouth Peninsula, have the potential to deliver 3,000 homes.

All three projects have planning permission, and so could start construction early next year. They give an opportunity for a major international investor – perhaps from the Middle East, from Asia or a Canadian player – to take a key stake in projects that could deliver a substantial private rented portfolio in one, neat, move.

Ballymore's Arrowhead Quay, where 990 apartments will be built

Ballymore’s Arrowhead Quay, where 990 apartments will be built

Also likely to be looking on with interest will be Fizzy Living, which recently received backing from Abu Dhabi investors and has been buying into developments around London.

For a private rented sector investor, the new build projects present a great opportunity to have the projects designed from the outset for rental. This is something that could help substantially reduce property management costs over the medium term, and is a privilege few PRS owners have so far enjoyed in the UK market, with many buying into projects planned and designed for open market sale.

London City Island has permission for a major expansion

London City Island has permission for a major expansion

For Ballymore, the search for an equity partner is a new departure. Previously the company has borrowed and built for open market sale, and has set the pace in terms of building high end apartments across London. It has also set price records on some of its sites.

More recently, the company has been pressed to sell on sites with permission for development, in order to bring in cash receipts to help reduce debt levels. This has been successful, with several projects sold and now under way in the hands of new owners.

A second phase at Embassy Gardens will deliver 870 apartments

A second phase at Embassy Gardens will deliver 870 apartments

However, Ballymore is now entering a new phase, and the new strategy of seeking an equity partner has been chosen, as a way to pay down debt but still give Ballymore an opportunity to earn profit from managing the build, and retaining an equity stake. Ballymore chief John Mulryan told Property Week: “Project ACE is the first time that we’ve worked like this…it’s about trying to earn some profit out of these projects, and we want to leave some equity in there.”

The three sites are:
Arrowhead Quay, Canary Wharf, where permission has been granted for 990 apartments in two towers of 50 and 55 storeys
a second phase at City Island in the Leamouth Peninsula, with permission for 1,145 homes
a second phase at Embassy Gardens in Nine Elms, close to the new US Embassy, where consent has been granted for 870 units

There should be no shortage of potential partners taking a look at the opportunity to partner with Ballymore. CBRE and Lazard are handling inquiries and vetting potential partners.

Tax threat to private rented sector growth

Developers active in the growing private rented sector are warning that tax changes proposed by the government could drive away essential foreign investors.
A consultation currently open to responses suggests introducing Capital Gains Tax on the sale of UK residential property. This could apply, it is suggested, even if the investment was made through an overseas fund, a vehicle that is currently exempt from a CGT charge.
“The government needs to make it very clear that it wants to encourage institutional investment,” said Bruce Ritchie, the chief executive of Residential Land, speaking to Property Week. The developer has built a substantial portfolio of rental properties in London, supported by overseas investors. “Foreign investors bring billions of pounds into the UK. At one end of the spectrum, it is saying that we need more homes and at the other, it’s thinking about taxing foreign investors.”
Also wary of such changes are developers Delancey, Capital & Counties, Land Securities and Grainger, all of whom have made responses during the consultation process. “It’s a very vulnerable time for this market,” said Grainger. “The government should not put securing investment at risk.”
The British Property Federation warns that the progress already made in the sector could be undermined by changes. “Imposing a further tax is very likely to act as a deterrent to those making large scale investments in the UK’s housing stock.” said the BPF’s Ian Fletcher.
The comments around the tax change contrast with views expressed just days ago about the progress of the private rented sector. Speaking at a recent conference and reflecting on the impact of the first year of the Build to Rent fund, Fletcher noted: “Good progress has been made in a short period, and initiatives such as the Build to Rent fund have helped in establishing the model and encouraging delivery. Projects on the ground are being delivered and there is real momentum coming from various players to put in place the market infrastructure that will further help to attract investors.”

Shell Centre approval likely to include major PRS element

Private rented sector apartments are expected to form a portion of the 790 homes to be created as the Shell Centre on London’s South Bank is redeveloped. Owners Canary Wharf Group and Qatari Diar are about to start work on the project, having received approval from communities secretary Eric Pickles in the last few days.

The £1.2bn project was called in for closer inspection, after questions were raised about the impact of the project and its planned additional towers, which will sit alongside the refurbished tower of the original Shell Centre.
As well as the new homes, in a variety of tenures, there will be new offices for Shell and other occupiers, retail and restaurants.

The Shell Centre redevelopment, with a substantial residential element, has received planning approval

The Shell Centre redevelopment, with a substantial residential element, has received planning approval

Qatari Diar is already working closely with its partner Delancey at the former Olympic athletes village in Stratford. There, the two have invested together to create a major private rented sector portfolio at East Village. And the company’s Get Living London management company has received praise for its performance, recently winning Best Newcomer in the Property Week residential awards.

The company is already establishing a South Village in the Elephant and Castle area of south London; don’t be surprised if part of the Shell Centre project becomes a further addition to the Get Living London portfolio.

Downes calls on planners to back private rented sector

Local planners need to embrace the professional private rented sector, and recognise it in development agreements. Only by including a private rented provision in section 106 agreements, will the sector gain the traction it needs.

That’s the argument put forward by Harry Downes, managing director of Fizzy Living. PRS developments need a leg-up from the planners, he says, in order to give them a chance in the current overheated development market. Currently, most sites to go a developer who builds for sale, as their business model – a quick turnaround with a full financial exit – allows them to bid more for building land.

“While true long-term PRS operators have to directly compete for sites with the deliverers of open-market sale property, the growth will be slow,” he warns in Property Week. “All sites are fiercely contested…the winner is usually the one whose residential valuation exercise knocks out the highest land value.”

The problem is, he adds, that someone holding the properties they build for a decade or more, with the liabilities of managing those properties built into the cost structure, will not be able to come up with such a frothy return as a house builder.

Downes says there are plenty of investors waiting to participate in the market, similar in scale to the Abu Dhabi Investment Authority, which put £200 million behind Fizzy Living earlier this year. Ready to invest long term, they have the potential to significantly change the rental market for the better, giving tenants well-designed, professionally managed properties they will want to live in.

Downes says one solution would be for section 106 agreements on major sites to include a PRS factor. These are legal documents, regularly entered into by developers and local authorities, and can cover a wide range of commitments from the parties. Often they deliver local infrastructure benefits, from new roads right down to park benches.
The terms of the deal could include a minimum size of, say, 50 units – to help deliver scale; it would cover a long term commitment for the rental units to remain so for a minimum period of, say, 10 years; and “where appropriate…an income cap on tenants, to ensure the flats are actually tenanted by the generation rent target market”.

As Downes reiterates, the problem of affordability is not going away anytime soon – in London, anyone looking to buy will currently need a deposit of around £80,000 to purchase their first home. The professional private rented sector is ready to deliver – but it needs a few simple elements of support to get the momentum going.

Investors pick and choose in European private rented sector markets

An increasing number of European investors are looking to the private rented sector as a suitably stable place to make medium term investments. And alongside established mainland markets, they are turning their attentions to the activity in the UK market.

Among them is the German insurance sector, which is increasing its allocation to property from 7.3% last year, to 7.7% in 2014, according to a report from EY Real Estate. Consolidation is taking place in the German residential rental market, with listed company Adler Real Estate receiving shareholder majority approval for its takeover of fellow German company Estavis, and the acquisition of a further 7,700 homes from seller Swiss Corestate. This grows Adler’s residential portfolio to nearly 25,000 units.

Some commentators are now suggesting investment values in the German residential market have strengthened too far in key urban German locations. Outside the main cities, prices are less strong, but other options include the Dutch market, which offers medium term appeal, as well as the possibilities offered by the growing UK institutional market.

In Holland, Bouwinvest has purchased a further 572 Dutch apartments, paying EUR150 million for a package of properties in Amsterdam, The Hague and Rotterdam. And Dutch pension fund manager APG has said it will increase its investment in residential across Europe, following a recent injection of EUR550 million which saw it buy a 22.8% stake in Finnish and Russian housing specialist SATO.

And alongside a recent investment in the UK private rented sector, with backing provided to Fizzy Living, Abu Dhabi investors are also backing the German residential market. The Abu Dhabi Invesment Authority recently bought a 13.4% stake in listed German housing company Deutsche Annington.