Housing Delivery Models - EM LawShare

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) – StephenPearson

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

• 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 RealmFund

• 12:00pm – 12:30pm (The Greensquare Project / Housing &Planning Act) – Matthew Grocock

• 12:30pm – 12:45pm (Q&A Session)


Introduction - Background toHousing Problems

• Affordability Gap

• Downgrading of RSL credit ratinghttp://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?


Trends in Affordable Housing 2005-2015


ALMOs


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 developmentpartner

• Contractual joint ventures

• JV Company structures

• Procurement-Faraday -v- West Berkshire Council

• Housing Zone funding


Direct delivery (1) – outline ofstructure


Direct delivery (2)

Key features:

• Procurement required (EU procurement if overthreshold – currently £4,592,704.79 (€5,225,000))

• Resource required

• LA takes disposal risk

• No "middle man" developer

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

• Can lead to significant returns but only after cost andsales risk


Direct delivery (3)

• This model is still not very common for housingdelivery

• BUT some examples:

– Lambeth (direct delivery)

– Barnet (direct delivery)

– Ealing (infrastructure)

• Useful where the market won't intervene at all, orwhere risk might be high, delaying delivery


Land Sales (1)

A) Land Sale Outline of Structure

LandThe Council Buyer/ Developer

Price


Land Sales (2)

Key features:

• If no development/services obligations, generally noEU procurement required

• S.123 Local Government Act 1972, s.127 LocalGovernment Act 1972, s.233 Town and CountryPlanning Act 1990

• Sale of Land Guidelines

• Generally should not include development obligations(so limited control)

• Buyback rights


Land Sales (3)


Contractual engagement withDevelopment Partner (1)


Contractual engagement withDevelopment 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 toProvide Infrastructure/Development(including Development services)

LandParcel

1

LandParcel

2

LandParcel

3

LandParcel

4

LandFunding

JV Agreement(Non Corporate)

The Council Investor

Land Value andProfit Share

Return oninvestment and

profit share

Saleproceeds


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)

LandParcel

1

LandParcel

2

LandParcel

3

LandParcel

4

Landvalue and

profitshare

The CouncilDevelopment

Partner

Land andpotentially

fundingProfit

share andDM Fee

Funding +DM

services(resources

&expertise)

Saleproceeds



• Distinguish developer partner delivery

• Key features

– EU procurement may not be required if JV partner does notprovide 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 requiresignificant Council resource (at both junior andsenior 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


Procurement-Faraday/WestBerkshire decision• Effect of Brexit

• R (Faraday Development Limited) -v- West BerkshireCouncil

• Agreement between Council and St Modwen for StModwen to acquire site in lots

• No obligation for St Modwen to take transfer/do works

• Compliance with s.123 Local Government Act 1972

• Agreement not within Public Contracts Regulations2015


Housing Zone funding (1)

• Housing Zones – "…areas where we can speed up and simplifythe process of house building on brownfield land through locallyled partnerships."

• London has started with their prospectus

• There is enough brownfield land to deliver up to 200,000 newhomes across the country

• Focus on partnerships between local authorities, government anddevelopers with everyone contributing

(Continued)



• £600 million already available in London

• £6.4 million of Housing Zone funding allocatedacross England, further funds to becomeavailable 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 WorksContract?

• 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 withdevelopment partner

• JVCo develops a range of properties includingWaterside flats / townhouses in Cardiff Bay

• Cross-subsidy into JVCo


Structure of deal (1)


Porthcwlis

BellerophonHomes

JV LLP

RCT

Fund

RCT

Figurehead

Contractor

RCT

Freehold @ Cardiff

6 TownhousesFreehold

Guarantee

Building Contract

Operating lease37 years

250 yearleases

DevelopmentAgreement

Porthcwlis

Funder

1st Charge

2nd Charge

Funder

199 yearLease

Contractor /Guarantor

BellerophonServicesLimited

Professionals

CommissionsDevelopment

BuildingContract

Townhousedevelopment 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, townhousessold 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 retailclients

AVIVA INVESTORS

RELI Housing Delivery

2016

CONTENTS

– AN INTRODUCTION TO AVIVA INVESTORS REAL ESTATE 3

– RELI FUNDS 4

– DEVELOPMENT FUNDING & DELIVERY STRUCTURE 5

– CASE STUDIES 7

For the investor

47

Specialists in real estateDelivering investment solutions on a global scale

Source Aviva Investors as at 30 September 2015

Peter Fitzgerald, Nick Samouilhan & Brendan Walsh - Lead Portfolio ManagersEd 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 debtinvestments

– Investment professionals in NewYork, 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 andAmsterdam

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 andoperations, 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 countrymandates

For the investor

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

48

LIME PROPERTY FUND REaLM FUNDS BESPOKE SEGREGATEDMANDATES

THE AVIVA PLC ANNUITYBUSINESS

• Created in 2004 for pensionschemes, as an alternative toinvesting in fixed income

• Target is to deliver a stablepredictable return in excess ofgilts

• Seek to reduce market riskthrough focussing on:

• Strong tenants (c 50%public sector)

• Long leases (over 20years average term)

• Inflation / Fixed upliftreviews (89%)

• Mature portfolio andcommitments of c £2 billioninvested across 69 assets

• Focus on long termrelationships not short termtrading

Aims to provide income streams fromdirect real estate that are a strongmatch to the liabilities of UK pensionfunds.

Four open-ended funds coveringCommercial Assets, Ground Rents,Social Housing and Infrastructure.

UK pension scheme investor base.

£1.7 billion raised to date.

Investment grade or equivalentcovenants.

Inflation linked leases i.e. RPI or CPI

Lease lengths of 25 years+

Preference for assets with no residualinterest or where the tenant has theright to buy back the property at theend of the lease for a nominal amount– “income strips”

All sectors considered including nontraditional commercial sectors.

• UK pension schemes

• c. £550 million

• Strong tenant covenants,preferably investment grade

• Lease lengths of 20 years+

• Inflation-linked and fixeduplifts / reviews

• All sectors consideredincluding non-traditionalcommercial sectors

Aviva plc has long been one ofthe UK’s largest annuitymanagers. Our Real EstateLong Income business provideslong-term, sterling-denominated, inflation-linkedincome to our annuity business.

Our annuity book targetslonger-dated transactions withleases of up to 50 years. Thesemulti-decade leases areespecially well suited tomatching long-term liabilitieslike those in an annuitybusiness.

For the investor

Development FundingFunding provided for developments broadly follows these steps:

49

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 DeliveryStructure

50

ContractorCouncil (SPV)

Tenants

Agreement tolease & HeadLease once

developmentcompleted

Portion ofnet rental

income paidto Aviva

ManagementAgreement

Developmentand fundingagreement

Potential forcapital or rentfree incentive

Freehold purchase

Key:Contract

Rights on defaultPayment Flow

Management Support

Manager

Aviva Investors Step inrights

Staircasing/Sales

ASTs (right tobuy

considerations)

Receipts retained byCouncil. Security for Aviva

funding can either bysubstituted or we can set

up a staircasing timerestriction

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 studyLondon

Development funding and profit rent with a local authority partner

CGI of Stephenson Quarter, Newcastle

52

For the investor


– Scheme currently in planning

– 1,200 units; 55% affordable/social, 45% PRS

– Scheme includes community facilities and schools.

– Aviva Investors to fund a 3 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 with annual RPI uplifts.

- Term of 45 years from practical completion.

Case studyBedfordshire


53

For the investor


– Scheme currently in discussion.

– Scheme designed at risk by Aviva partners.

– 100 units; 30% affordable/social, 70% PRS

– Aviva Investors to fund a 2 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 with annual RPI uplifts.

- Term of 40 years from practical completion, with a

buy back provision at year 25.

- Co-investment model, where Council on lend into

the development at commercial rates.

Case studyAdur and Worthing


54

For the investor

Established experience of public sector investment

55

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 onfunder

• 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 theseller


Question

Housing and Planning Act 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?


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