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Housing Delivery Models

Chaired by Stephen Pearson

Partner (Freeths)

Matthew Grocock (Freeths - Real Estate), Steven Smith (Bevan Brittan), Mark Wells(Aviva)

www.emlawshare.co.uk

Timetable

• 9.45am – 10:00am (Introduction and Background) – Stephen

Pearson

• 10:00am – 10:45am (Delivery Models) – Steven Smith, Bevan

Brittan

• 10:45am – 11:15am (Procurement Issues / “One We Did Earlier”

The RCT Experience) – Stephen Pearson

• 11:15am – 11:30am (Coffee Break)

• 11:30am – 12:00pm (Guest Speaker) – Mark Wells, Aviva Realm

Fund

• 12:00pm – 12:30pm (The Greensquare Project / Housing &

Planning Bill) – Matthew Grocock

• 12:30pm – 12:45pm (Q&A Session)


Introduction - Background to

Housing Problems • Affordability Gap

• Downgrading of RSL credit rating http://www.wmhousing.co.uk/upload/public/Documents/Corporate/Investors/Credit

-rating/17-5-13-English_Housing_Associations_Press_Release.pdf

• “Right to Buy” being extended to RSL tenants

• Rent controls

• Housing benefit, restricted LHA levels

• Net migration at all time high 330,000? 500,000?

http://www.wmhousing.co.uk/upload/public/Documents/Corporate/Investors/Credit-rating/17-5-13-English_Housing_Associations_Press_Release.pdf










Trends in Affordable Housing 2005-2015






ALMOs

https://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiRjfCLpNfMAhUrLsAKHUrNDukQjRwIBw&url=https://www.reddit.com/r/MadMudmen/comments/3x7des/gar_gar_i_have_chained_up_stupid_bird_gar/&bvm=bv.122129774,d.ZGg&psig=AFQjCNGjf5rJgLiEyx_WX3UerfYS5mrr-Q&ust=1463236787447915


Today’s trends

• Direct delivery (eg Telford Housing)

• Partnerships

8


The results are …

9

Any questions?


Joint Venture Delivery Models

Steven Smith, Partner

Bevan Brittan LLP


What will we cover?

Options for Local Authorities to deliver housing:

• Direct delivery

• Land sales

• Contractual engagement with a development

partner

• Contractual joint ventures

• JV Company structures

• Housing Zone funding


Direct delivery (1) – outline of

structure


Direct delivery (2)

Key features:

• Procurement required (EU procurement if over

threshold – currently £4,104,394 (€5,225,000))

• Resource required

• LA takes disposal risk

• No "middle man" developer

• LA has greater control over eg. timing and what is

delivered

• Can lead to significant returns but only after cost and

sales risk


Direct delivery (3)

• This model is still not very common for housing

delivery

• BUT some examples:

– Lambeth (direct delivery)

– Barnet (direct delivery)

– Ealing (infrastructure)

• Useful where the market won't intervene at all, or

where risk might be high, delaying delivery


Land Sales (1)

A) Land Sale Outline of Structure

Land

The Council

Buyer/ Developer

Price


Land Sales (2)

Key features:

• If no development/services obligations, generally no

EU procurement required

• S.123 Local Government Act 1972, s.127 Local

Government Act 1972, s.233 Town and Country

Planning Act 1990

• Sale of Land Guidelines

• Generally should not include development obligations

(so limited control)

• Buyback rights


Land Sales (3)


Contractual engagement with

Development Partner (1)

The Council Buyer /

Developer Building

Contractor

Architect

Other Professionals

Employer's Agent

M&E Engineer

Subcontractor Roofing

Subcontractor Flooring

Subcontractor Geotechnical

Subcontractor Misc

Collateral Warranties

Collateral Warranties

Price

Land

Building Contract

Professional Appointments

Subcontracts


Contractual engagement with

Development Partner (2)

Key features:

• Procurement required (EU procurement, if over EU threshold – currently

£4,104,394 (€5,225,000))

• Access to developer expertise/resource

• Access to private funding

• Reduced control over content and timetable, BUT can be protected by:

– conditions precedent, including availability of development funding

– development approval rights (beyond planning)

– deferred grant of land interest

– if public funding is contributed, stage payments against delivery

– development programme/milestones

– step-in/termination rights

• Protections to be balanced against fundability


Contractual joint ventures (1)

Procurement of Works/Services to

Provide Infrastructure/Development

(including Development services)

Land

Parcel

1

Land

Parcel

2

Land

Parcel

3

Land

Parcel

4

Land Funding

JV Agreement

(Non Corporate)

The Council Investor

Land Value and

Profit Share

Return on

investment and

profit share

Sale

proceeds



Integrated Joint Venture – Investor Partner

Integrated JV Agreement (Non-Corporate) –

(direct development and/or passing

developments to the market post-planning)

Land

Parcel

1

Land

Parcel

2

Land

Parcel

3

Land

Parcel

4

Land

value and

profit

share

The Council Development

Partner

Land and

potentially

funding Profit

share and

DM Fee

Funding +

DM

services

(resources

&

expertise)

Sale

proceeds



• Distinguish developer partner delivery

• Key features

– EU procurement may not be required if JV partner does not

provide works or services

– Public and private partners share risk

– LA has more influence throughout the development's life

– Facilitates private funding

– Often (but not always) 50/50 contributions

– Property ownership

(Continued)



• Key features (continued)

– Access to development expertise but may require

significant Council resource (at both junior and

senior level)

– Can generate greater returns for the authority

– Reputation risk

– No limited liability

– Tax transparency


JV Company structures (1)

A multi-site Joint Venture Company structure:



JV Company – key features:

• Vehicle – limited liability LLP

• 50/50 shareholding and deadlock

• Matched equity stakes – land and cash

• Finance – mezzanine and senior debt

• JV control over development and delivery

• No exclusivity (but 10 – 20 year arrangement)

• Working capital as and when required

(Continued)



JV Company - advantages :

• Incentivises private sector to deliver over time

• Leveraging private sectors skills

• Economies of scale and potential cross-subsidy

• Long term returns potential – share in development uplift

• Private sector covenant and market credibility

• Deadlock enables public sector to block unacceptable proposals

• Control through business plan and site plans

• Future projects not subject to OJEU or EU procurement

• JV can shape local KPIs and meet wider LA objectives

• Lower procurement time and cost implications



JV Company – challenges:

• Critical mass and low land values

• Loss of public sector control (in traditional context)

• Deadlock could lead to breakdown

• Sale of private sector interest

• Resource commitment – time and cost

• Up front procurement

• Political perception – sale of family silver


Housing Zone funding (1)

• Housing Zones – "…areas where we can speed up and simplify

the process of house building on brownfield land through locally

led partnerships."

• London has started with their prospectus

• There is enough brownfield land to deliver up to 200,000 new

homes across the country

• Focus on partnerships between local authorities, government and

developers with everyone contributing

(Continued)



• £600 million already available in London

• £6.4 million of Housing Zone funding allocated

across England, further funds to become

available in due course

• Involves working with a private sector developer

• Designed to ease housing pressures



• Practical examples of its application:

– Accountable body

– Engagement with private sector partner

– Governance

– Required outputs

– Sanctions

“One We Did Earlier”

The RCT Experience

Stephen Pearson


RCT Homes

• Largest social housing provider in Wales

– Poor quality housing

– Issues with damp, subsidence etc

– Low property values – terraced houses for

£40,000!


Issues common to RSLs

• Reluctance of banks to lend

• Difficult financial covenant

• Ambivalent attitude of Las

• Limitations on rent / housing benefits

• Restrictions on type of tenancy


Procurement issues?

• Commissioning of properties = Public Works

Contract?

• Finance? – Probably not (Regulation 10.1(e)(f)

PCR 2015)

• Creating new JVCo – probably not

• JVCo not a Teckal company / public body?


The RCT solution …

• Procurement of a joined-up framework solution,

contractors and funders – led by Bellerophon

• Finance provider – Legal & General Pension Fund

(comparable with PWLB rates)

• Joint venture company “Porthcwlis” formed with

development partner

• JVCo develops a range of properties including

Waterside flats / townhouses in Cardiff Bay

• Cross-subsidy into JVCo


Structure of deal (1)


Porthcwlis

Bellerophon Homes

JV LLP

RCT

Fund

RCT

Figurehead

Contractor

RCT

Freehold @ Cardiff

6 Townhouses

Freehold

Guarantee

Building Contract

Operating lease

37 years

250 year

leases

Development

Agreement

Porthcwlis

Funder

1st Charge

2nd Charge

Funder

199 year

Lease

Contractor /

Guarantor

Bellerophon

Services

Limited

Professionals

Commissions

Development

Building

Contract

Townhouse

developmen

t agreement

Cardiff Cwmbach

PCG


Structure of deal (2)

• RCT → Funder 199 year lease

• Funder → RCT 37 year leaseback of site with

properties

• Rent ↑ by CPI annually, take void risk

• Properties revert at end of 37 year terms

• Development managed by JVCo, townhouses

sold off to defray investment


Pros & Cons of Structure


Pros:

• “Fundable”

• “Replicable” – including by Las

• Cost control via L&G technical team

• Cross-subsidy improves investment

• “Security package” works


Cons:

• Due diligence

• Risk of voids

• Risk of inflation:

– Commission

– warranties

Any questions?

This document is for Professional Clients, institutional/qualified investors and Advisers only. It is not to be viewed by or used with retail

clients

AVIVA INVESTORS

RELI Housing Delivery

2016

CONTENTS

– AN INTRODUCTION TO AVIVA INVESTORS REAL ESTATE 3

– RELI FUNDS 4

– DEVELOPMENT FUNDING & DELIVERY STRUCTURE 5

– CASE STUDY 6

For the investor

46

Specialists in real estate Delivering investment solutions on a global scale

Source Aviva Investors as at 30 September 2015

Peter Fitzgerald, Nick Samouilhan & Brendan Walsh - Lead Portfolio Managers Ed Casal CEO Global Real Estate

– Expertise across real estate sectors – Value enhancement capabilities – Liability driven to high return outcomes – Investment professionals in London,

Paris, Frankfurt

Direct investments Asset management

– Sector specialist teams, – Deep expertise and value add to

portfolios

Indirect investment

– Private and listed equity and debt investments

– Investment professionals in New York, London, Paris, Amsterdam and Singapore

– Over 250 investment holdings

AUM £32/€44/$49 billion

Direct and indirect

Offices in London

40 portfolio managers

28 asset managers

18 analysts and

strategists

UK

Direct and indirect

Offices in Paris, Frankfurt

and Amsterdam


3 asset managers

1 analyst

Europe North America

Indirect only

Offices in New York


Asia

Indirect only

Offices in Singapore


Global support – fund analysts, strategy and research, investment and business risk, finance and operations,

legal, compliance, client service, business and product development, HR, IT, project management

Mandate Structures

– Segregated mandates – Joint Ventures – Institutional Funds – Registered funds for retail and HNW – Global, regional, single country

mandates

For the investor

Real Estate Long Income Funds Access to multiple funds delivering loan capital from £10m to over £500m

47

LIME PROPERTY FUND REaLM FUNDS BESPOKE SEGREGATED

MANDATES

THE AVIVA PLC ANNUITY

BUSINESS

• Created in 2004 for pension

schemes, as an alternative to

investing in fixed income

• Target is to deliver a stable

predictable return in excess of

gilts

• Seek to reduce market risk

through focussing on:

• Strong tenants (c 50%

public sector)

• Long leases (over 20

years average term)

• Inflation / Fixed uplift

reviews (89%)

• Mature portfolio and

commitments of c £2 billion

invested across 69 assets

• Focus on long term

relationships not short term

trading

Aims to provide income streams from

direct real estate that are a strong

match to the liabilities of UK pension

funds.

Four open-ended funds covering

Commercial Assets, Ground Rents,

Social Housing and Infrastructure.

UK pension scheme investor base.

£1.7 billion raised to date.

Investment grade or equivalent

covenants.

Inflation linked leases i.e. RPI or CPI

Lease lengths of 25 years+

Preference for assets with no residual

interest or where the tenant has the

right to buy back the property at the

end of the lease for a nominal amount

– “income strips”

All sectors considered including non

traditional commercial sectors.

• UK pension schemes

• c. £550 million

• Strong tenant covenants,

preferably investment grade

• Lease lengths of 20 years+

• Inflation-linked and fixed

uplifts / reviews

• All sectors considered

including non-traditional

commercial sectors

Aviva plc has long been one of

the UK’s largest annuity

managers. Our Real Estate

Long Income business provides

long-term, sterling-

denominated, inflation-linked

income to our annuity business.

Our annuity book targets

longer-dated transactions with

leases of up to 50 years. These

multi-decade leases are

especially well suited to

matching long-term liabilities

like those in an annuity

business.

For the investor

Development Funding

Funding provided for developments broadly follows these steps:

48

Developer Partner achieves planning permission

Tenant enters into an agreement for lease

Aviva Investors Fund purchases freehold or long-leasehold

Aviva Investors fund the development and manage all construction risks

At the end of the lease, depending on the structure agreed, the Tenant can either:

Tenant enters into a lease at practical completion over the agreed term

Tenant can choose to sub let or occupy the asset

Walk away or extend the lease Purchase the freehold for £1

For the investor

Housing Delivery Structure

49

Contractor Council (SPV)

Tenants

Agreement to

lease & Head

Lease once

development

completed

Portion of net

rental income

paid to Aviva

Management

Agreement

Development

and funding

agreement

Potential for

capital or rent

free incentive

Freehold purchase

Key: Contract

Rights on default

Payment Flow

Management Support

Manager

Aviva Investors Step in

rights

Staircasing/Sales

ASTs (right to

buy

considerations)

Receipts retained by Council.

Security for Aviva funding can

either by substituted or we

can set up a staircasing time

restriction

CASE STUDY

For the investor

Transaction background

– Scheme currently in planning

– 1,800 units; 30% social, 20% affordable,

50% PRS

– Aviva Investors and others to fund a 6 year

build period

– At practical completion, a Council takes a

lease over all units. No risk is taken by the

Council during development

Funding

- Funding is structured to account for the fact

that no uplifts are expected in social rents

over time.

- This provides a lower blended expected

uplift in revenue, which we will match as a

funder.

Case study Stratford, London

Development funding and profit rent with a local authority partner

CGI of Stephenson Quarter, Newcastle

51

For the investor

Established experience of public sector investment

52

The Greensquare Project

Matthew Grocock



• REaLM Social Housing Fund

(Return Enhancing and Liability Matching)

• Lease & leaseback with Derwent HA September 2011

• Greensquare: December 2012

• Cosmopolitan HCA Rescue 2012/2013

Background


Greensquare

• Registered Provider of Social Housing

• Registered with the HCA

• Oxfordshire, Wiltshire & Gloucestershire

• Increase by 2,000 properties by 2025


Acquisition

• From Guinness

• Instructed on Purchase April/May 2013

• Acquired 191 properties & Family Centre

• General Needs Housing

• L&LB of 178 social rented properties


Funding

• Headlease for 125 years at a Premium

• Sublease –min 34 years -at an annual rent

• Sublease term to fit the financial model

• Rent increase -RPI or CPI

• Provision for substitution of units


Issues arising

• 172 Housing & Regeneration Act 2008

–consent from regulator –more scrutiny

• S106 Agreements –MiP clauses

• Nominations Agreements –not to be binding on

funder

• Certificates of Title


Structure


Funding for Councils

• ASTs

• Right to Buy –substitution?

• SDLT


Other Structures

• Building –long lease to Company or LLP?

• Company Limited by Shares if a JV Partner

• VAT –Golden Brick –concessionary by HMRC

• Corporation Tax –specific advice needed

• SDLT –lease at a peppercorn? –valuation

• Disapplication of VAT election –issue for the

seller


Question

Housing and Planning Bill 2016

• S3 –Promote development of Starter Homes

• Right to Buy –Housing Association tenants

• Pay to stay -£30k/£40k

• Government emphasis on home ownership

• Shortage of affordable homes for rent

• Secure affordable homes for ordinary people?


Questions for the Panel?


Check out the website …


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