Monthly Archives: March 2015

Iain Murray of Criterion Capital

Land must be unlocked to solve homes crisis

Guest post from Iain Murray, Director of PRS at Criterion Capital

As we head towards a general election politicians of all hue are finally acknowledging the severity of London’s housing crisis. The variety of economic, social and geo-political forces that have colluded to create this crisis are too complex to solve in one fell swoop, but there are incremental changes that can, and should, be applied to alleviate at least part of the problem.

There is a received wisdom that the current housing crisis is at least in part down to a constraint of development land. Yet, as well-developed as London is, there is no real shortage of available land. All 33 London boroughs have pockets of space available that they have not yet had the vision or incentive to convert into development opportunities.

Recent well-publicised initiatives, such as the Government Property Finder and Permitted Development Rights have gone some way to unlocking land and encouraging development in some areas, but there is still a long way to go.

London’s population is set to reach 11 million by 2050 and the current rate of housebuilding in the capital is worryingly out of step with this projected growth. Given that home ownership is increasingly beyond the reach for all but a minority of under 35’s and that London’s new inhabitants are likely to be younger, it stands to reason that there is growing pressure on the build-to-rent sector to deliver a significant volume of new homes.

Heavyweights such as Legal & General have stated that they are committed to investing £1bn into the sector, yet this has yet to convert into new homes ready for people to move into. At Criterion Capital, we have a pipeline of 4,000 units for delivery by late 2016 in areas such as Basildon, Croydon and Sutton and are actively looking for more development opportunity. In short, the demand is there but, as an industry, we just can’t build it out quickly enough.

Despite the weight of capital heading towards the sector, we have still not seen the level of development required to alleviate the housing shortage. We know from experience that the large institutions have an appetite for investment, but there aren’t currently enough development opportunities to build enough product, quickly enough to deliver the required scale.

This is where both central and local government must take a proactive stance in encouraging development in the build-to-rent sector. Unlike the traditional housebuilders, build-to-rent operators cannot be accused of siting on landbanks and manipulating values through a lack of development activity. To succeed, they need product out of the ground and generating income quickly. By any measure, this should sit comfortably with a government that needs to house a growing population in accommodation that is fit-for-purpose, sustainable and responsibly managed.

If this sounds too tall an order, let us remember that London’s government recently oversaw a powerful development corporation with the power to over-rule individual boroughs and unlock huge swathes of land for development quickly to facilitate the London 2012 Olympics. If this could be replicated to ensure the speedy delivery of much required new homes throughout its boroughs, that really would be a lasting legacy.

Iain Murray
Director of PRS at Criterion Capital


Grainger adds two Hampshire PRS projects

Grainger has won planning permission for two major build to rent developments in Hampshire. The schemes, at Berewood, Waterlooville and Wellesley in Aldershot will deliver 212 homes for rental.

The projects are both phases of larger phased residential developments, and have been brought forward from a planned start date that would have been years into the future. The permission at Berewood an innovative planning agreement with the local authority – another demonstration that planners can help unlock PRS projects in their neighbourhoods.

“These new build-to-rent developments will not only deliver much needed new homes in the local area but also support our desire to provide purpose built, quality private rental accommodation as well as accelerate the provision of amenities for the community as a whole,” said Grainger executive director Nick Jopling.

“Today’s news supports Grainger’s strategy to grow its market rented business and our increasing focus on investment outside of London, where we have extensive experience managing residential portfolios. Grainger is committed to the market rented sector where we can bring our long and established track record of managing homes to the highest standards for people across the UK for the benefit of all our stakeholders.”

At Berewood, Grainger has reacted to local market conditions. Local authority Winchester Council saw a major increase in the number of privately rented households in its area, up 50% between 2001 and 2011; an even more dramatic 100% increase was observed in neighbouring Havant. A deal with planners sees 104 new homes built with a guarantee they will remain PRS housing at market rents for at least 12 years, after which 40% of them – 42 units – will become affordable housing, and will revert to Grainger’s social housing subsidiary Grainger Trust. The deal effectively gives Grainger a 12 year guarantee of returns at open market rents, to recover their investment.

At Wellesley, the permission for the 108 homes for rent is not tied to future conditions. The project as a whole, which includes  3,850 homes, already has a provision that 35% of the total will be affordable.

The company says its commitment to the Hampshire developments proves that purpose built PRS development can work outside city centres, in more suburban environments.

Aberdeen invests £60m in Stratford PRS tower

Investor Aberdeen Asset Management has bought a 26 storey tower block of 166 let apartments in Stratford, east London. The deal indicates the appetite of long term investors in the private rented sector, and specifically in buying completed, well let developments.

The £60 million deal is part of a commitment from Aberdeen to invest around £500 million in the UK residential market over the next five years. The Stratford block will be held within the group’s Aberdeen Property Trust investment vehicle.

“This is the Fund’s largest investment into the private rented sector and it will provide a strong sustainable income stream to the fund,” said fund manager Gerry Ferguson. “It also helps with further risk reduction which has been one of the hallmarks of the Trust over the ten years which we’ve been managing it, and we anticipate adding more high quality private rented properties in the future.”

The block, originally part of a project named Athena, has an unusual history. It was due to be completed for the 2012 Olympics, before financial problems hit its backers. Only recently has it been completed.

Owned by Aberdeen: 180 Stratford

Owned by Aberdeen: 180 Stratford

Aberdeen already manages around £1.2 billion of residential assets, outside the UK, of which half are still being developed. Ed Crockett, property fund manager, said the investor has a large appetite: “This purchase is part of a wider commitment which Aberdeen has to the private rental sector. The property is in one of the most vibrant and affordable locations in London. The city’s population is growing at a rate most would associate more with an emerging market than a developed one, which is one reason that private residential units are an attractive investment for us.”

“Long term asset managers like Aberdeen are ideal landlords for private residential tenants. They bring the full weight of their experience managing real estates assets to bear on the growing private residential sector, and combine it with the professionalism which our own clients demand.”

Russell Chaplin, Aberdeen’s chief investment officer for property, added: “This is the latest in a line of private residential purchases which Aberdeen has made across Europe on behalf of its clients. The case for the sector to grow, particularly in Europe’s winning cities, is clear with the number of people predicted to rent property set to increase over the coming years. We believe there is plenty of opportunity to grow the amount of assets we own in the years to come.”

The block at 180 Stratford High Street is part of a larger scheme originally named Athena and started by the Irish McFeely group. The developer went bust before the Olympics in 2012, leaving the scheme incomplete. More recently, investor Long Harbour bought the building, completed the development and rebranded it, before letting all the flats over a four month period.

Long Harbour is an asset manager that has around £600 million of money invested across a range of property and infrastructure assets. The company called the deal “part of the natural turnover of Long Harbour’s PRS portfolio” and said it would be investing further in the private rented sector.

Student moves show the way for PRS investors

International investors are buying into UK student accommodation in a big way, as they open their eyes to alternative investment assets.

Two North American investors and a Russian oligarch have between them spent $2.5 billion in the last few weeks on UK student housing developments. The moves give a hint of the demand for residential assets that could soon head into the UK private rented sector – as soon as completed developments are available for sale.

The US buyers are Greystar and the Canada Pension Plan Investment Board. Greystar, which likes anything with beds in, has agreed to buy a £600m portfolio of Nido branded student housing from UK private equity seller Round Hill Capital, reports the Wall Street Journal. This follows the pension board’s purchase of UK student housing company Liberty Living, in a £1.1 billion deal that gives it 16,700 rooms across 17 cities.

Meanwhile, Russian oligarch Mikhail Fridman is reported to have splashed out around £532m for another student accommodation portfolio. And investor Carlyle Group has sold its Pure Student Living portfolio, which had grown to 2,170 student rooms across five London sites, to a Luxembourg based investor, LetterOne Treasury Services.

In the UK market, student housing has seen massive growth, with early investors profiting from the growth of a new dedicated market to house university students in purpose built accommodation on or near further education campuses across the country. Returns are now coming down, with prices rising as more investors move into the space. Real Capital Analytics assesses the average sector return at 5.8% this year, down from 6.4% last year.

More PRS for Olympic village project

Balfour Beatty has signed a £35m investment deal with the London Legacy Development Corporation to develop more new homes around the former Olympic site in Stratford.

Two new neighbourhoods, named East Wick and Sweetwater, will be created over the next eight years, in a joint venture with Places for People. Together, the pair are destined to include 450 affordable homes, 530 units for market sale and 500 private rented sector homes.

There will be a mix of townhouses, mews homes and apartments, while the new settlements will also include a new nursery, library and health centre, with shops and office space. East Wick is to the north west of the former Olympic site, adjacent to the former press centre, which is itself being transformed into a new centre for digital business under the brand Here East. Sweetwater, also on the western side of the park, will be to the south of East Wick.


East Wick and Sweetwater will sit to the west of the Olympic Park

East Wick and Sweetwater will sit to the west of the Olympic Park

“This project marks our entry as an investor and developer into the UK’s regeneration and housing sector,” said Leo Quinn, chief executive of Balfour Beatty Group. “This market is growing and offers significant opportunities for the Group in the coming years. I look forward to continuing our strong partnership with the London Legacy Development Corporation to ensure that commitments made as part of the London 2012 Games are delivered. With our partner, Places for People, we are very excited to be able to create these new, vibrant, sustainable communities for East London.”

David Cowans, chief executive at Places for People, said: “With our partner, Balfour Beatty, we have the perfect opportunity to work with LLDC to create a truly unique and exciting place to live. This is exactly what Places for People is about, making great places and ensuring that the true Legacy of 2012 lives on by creating opportunities for the existing communities around the park to share in its success.”

Designs include these funky round towers

Designs include these funky round towers

Designs for the two new settlements have already been prepared. An architectural team includes Studio Egret West, Sheppard Robson, Alison Brooks Architects, ShedKM, Piercy & Co and Astudio.

Rent controls could help PRS develop

As the May general election approaches, attitudes towards the Labour Party’s suggestion that private sector rents should be controlled is starting to receive a wider level of support. And some of that support is coming from new institutional investors in the sector.

In comments reported in the Financial Times, John German of Invesco Real Estate, who is also on the residential committee of the British Property Federation, indicated that some level of control would not cause a problem for institutional investors, who stand poised to invest billions in the UK private rented market.

“There are rent controls and rent controls,” said German. On rent rises he said some upper cap on annual increases, perhaps indexed, “would create exactly the type of investment that a lot of institutions are looking for, which is a linkage to inflation”.

Labour has proposed among its election policies that it would look to introduce rent controls to limit increases; and give tenants greater security of tenure by offering longer tenancy agreements. “The feedback I get from the political parties is that they get the idea residential property is a huge asset class in the UK,” added German. “They see investment by institutions in the UK private rented sector as an ideal way of trying to tackle some of the housing problems in the UK.”

Invesco, already active in other mainland European residential investment markets, has indicated it thinks the UK PRS market is fundamentally attractive with the potential for attractive returns. And the company has already backed developer Be:Here with a £33m investment in its PRS scheme in Hayes with the promise it will support further Be:Here projects with investment.

And writing in the New Statesman, London Labour MP David Lammy argues for a middle line when considering rent controls. “Let me be clear about what I mean when I talk about rent control. I don’t mean the old-school “first generation” rent control that was introduced in the UK during the Great War, which prevents any increase in rents, diminishes investment returns in real-terms over time, and discourages people from becoming landlords. I don’t mean the type of rent control that keeps rents so low that they are not enough to pay for the proper maintenance of a home in a liveable condition. I mean rent controls that nod to the market but allow for the realities of what it is to have a home to live in; the type that are espoused by those who could hardly be called left-wing ideologues, including Angela Merkel and Michael Bloomberg.”

He favours the German system, noting that:
• renters have tenancies with no end date and can only be evicted under a restrictive number of circumstances, such as being behind with rent, or damaging the property
• landlords cover the charges of letting agents (i.e. they get included in rent)
• initial rents cannot be more than 20% above average local rents
• rent rises are capped at 20% over three years
• rents are linked to a commitment from the landlord to retain the property in good condition
He concludes: “Perhaps a system like Germany’s is exactly what London needs to address the uncertainty and unaffordability faced by tenants in our private rented sector.”

Lammy’s linkage with the German market is highly significant. Invesco has already invested more than £100m in housing in that market, effectively declaring itself satisfied with the German system. And German investor Patrizia, which has made a highly successful business out of investing in the German private rented sector, is now looking to create a similar, large scale, operation here.

Lammy further argues that the British supply problem “has more to do with cautious developers, the planning process, and a scarcity of developable land than it does with rent prices.” He argues for conditions to encourage more institutional development, such as concessions on rent controls for new developments. “Rent controls should not apply to any new property built after 1 January 2014. Or maybe they should not apply to the first tenant of any new development; that will have the added benefit of encouraging longer term leases by property developers.”

Concludes Lammy, MP for Tottenham: “Though not a silver bullet that will singlehandedly solve the crisis, we should think about how rent controls – done sensibly – can be part of a comprehensive plan to ensure that all Londoners can afford a home in our city.” The New Statesman article is here.