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Diversification – commercial residential markets

Matt Cooper Director of Treasury and Corporate Finance. Diversification – commercial residential markets. Group Overview. £320m turnover £75m surplus 56,856 homes Aa3 Moody’s rating. We operate in over 100 local authorities, actively developing in about 30. Our objectives.

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Diversification – commercial residential markets

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  1. Matt Cooper Director of Treasury and Corporate Finance Diversification – commercial residential markets

  2. Group Overview £320m turnover £75m surplus 56,856 homes Aa3 Moody’s rating We operate in over 100 local authorities, actively developing in about 30

  3. Our objectives • Core Objectives • To be a housing provider of choice; • To maintain our financial strength; and • To grow our business • Enabling Objectives • Increasing our influence; and • Being an employer of choice A business for social purpose

  4. WHY DIVERSIFY?

  5. Funding Model Grant Debt

  6. Need alternative subsidy • Market sale • Generates a subsidy with return of capital • Builds on Group’s experience and knowledge • Fits geographical footprint of the Group • Brings risks that need to be managed

  7. Joint Ventures • 50/50 JVs with developers • Gain expertise from developer • Share risk and reward • Spread capacity across more projects • No recourse to social housing assets Using JV experience to move towards in-house development

  8. Build for Sale • Return target • Matrix based approach • Planning • Sales/Market • Cost & delivery • Knowledge/experience • Eg. If 1 high; 2 medium; 3&4 low => 22% RoS • Stress testing Commercial return for taking a commercial risk

  9. Our Financial Golden Rules These internal rules were established 10 years ago and have been tightened over time. They are reviewed and reinforced annually by the Group Board. • Debt service ratio to stay above 115% • No reliance on sales to meet underlying obligations • Regeneration of existing stock to be economically positive or neutral • Contracted development to be covered by cash and available facilities • Debt to turnover not to exceed 5 • Sales as a percentage of Turnover not to exceed 30% (excluding regeneration) Business plan is stress tested against these

  10. Development Programme • Delivered 805 new homes during 2013/14 • Rent 539; shared ownership 198; market sale 68 • Affordable development • 2011-15 AHP - 2,500 homes • 2015-18 AHP - 1,800 homes • Private development • City Road – 200 units • Farm Lane – 89 units • Hampstead Reach – 60 units • Blackfriars Road – 43 units Balance delivery of social objectives with maintaining financial strength

  11. MARKET RENT

  12. Current market • Over the last century owner occupation has become by far the most common tenor type; however, since the credit crunch this growth has slowed an started to reverse • In this time PRS has filled the void with twice as many households privately renting now compared to the beginning of the millennium • The growth in PRS is expected to continue Source: DCLG

  13. Investment • Majority of the yield is from capital appreciation which is more difficult to monetise • Commercial property, which has a massive institutional investor base, is predominantly rental yield • It is still very unclear whether this sector will become a more institutionally investor friendly market Source: DCLG; IPD

  14. Scope of review • Hold the PRS assets in a separate non/limited recourse vehicle • The Group would provide an equity injection of and source external debt • Focus on rental income but with some capital growth to ensure that we could liquidate the position if required • Combined the Group’s appraisal assumptions with more generic sector specific ones • Geographical spread

  15. Findings • Can generate 3-6% net rental yield • Rental returns are greater outside London and South East (by over 1%) however build costs may need to be below current assumptions to achieve developers’ profit or else it may not be viable • On a mixed geographical portfolio we can generate c8.5% return over 40 years • 4% in year 1 and 6% by year 10 • This return includes 25% developers’ profit • Capital return is required but is risky and difficult to predict • Could increase return by focusing on specific areas • Need to be careful not to cherry pick • Market data tends to be on a broad area basis

  16. Capital return is risky, but so is income… Source: ONS; Savills

  17. PRS - Summary • Looking to generate commercial return • Does not meet any definition of charitable or social activity • Need capital appreciation • Difficult to predict • Even with capital appreciation need developers’ profit • Quicker return and less risk from building and selling the units Not strategic but may be a tactical solution

  18. CONCLUSION • Need alternative subsidy • Either commercial or charitable • Commercial return for taking commercial risk • Balance delivery of social objectives with • maintaining financial strength

  19. Thank you

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