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TRANSCRIPT
Housing Delivery Models
Chaired by Stephen Pearson
Partner (Freeths)
Matthew Grocock (Freeths - Real Estate), Steven Smith (Bevan Brittan), Mark Wells(Aviva)
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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)
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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?
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Trends in Affordable Housing 2005-2015
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Trends in Affordable Housing 2005-2015
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Trends in Affordable Housing 2005-2015
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Today’s trends
• Direct delivery (eg Telford Housing)
• Partnerships
8
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The results are …
9
Any questions?
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Joint Venture Delivery Models
Steven Smith, Partner
Bevan Brittan LLP
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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
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Direct delivery (1) – outline of
structure
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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
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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
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Land Sales (1)
A) Land Sale Outline of Structure
Land
The Council
Buyer/ Developer
Price
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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
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Land Sales (3)
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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
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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
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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
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Contractual joint ventures (2)
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
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Contractual joint ventures (3)
• 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)
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Contractual joint ventures (4)
• 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
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JV Company structures (1)
A multi-site Joint Venture Company structure:
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JV Company structures (2)
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)
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JV Company structures (3)
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
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JV Company structures (4)
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
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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)
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Housing Zone funding (2)
• £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
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Housing Zone funding (3)
• 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
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RCT Homes
• Largest social housing provider in Wales
– Poor quality housing
– Issues with damp, subsidence etc
– Low property values – terraced houses for
£40,000!
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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
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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?
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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
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Structure of deal (1)
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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
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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
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Pros & Cons of Structure
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Pros:
• “Fundable”
• “Replicable” – including by Las
• Cost control via L&G technical team
• Cross-subsidy improves investment
• “Security package” works
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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
8 portfolio managers
3 asset managers
1 analyst
Europe North America
Indirect only
Offices in New York
4 portfolio managers
Asia
Indirect only
Offices in Singapore
4 portfolio managers
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
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• 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
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Greensquare
• Registered Provider of Social Housing
• Registered with the HCA
• Oxfordshire, Wiltshire & Gloucestershire
• Increase by 2,000 properties by 2025
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Acquisition
• From Guinness
• Instructed on Purchase April/May 2013
• Acquired 191 properties & Family Centre
• General Needs Housing
• L&LB of 178 social rented properties
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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
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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
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Structure
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Funding for Councils
• ASTs
• Right to Buy –substitution?
• SDLT
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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
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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?
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Questions for the Panel?
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Check out the website …
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