PRIVATE RENTED SECTOR
Housing association believes Macquarie’s backing will attract institutions, writes Doug Morrison
UK institutions have been conspicuous by their absence from residential investment, but a progressive rental scheme by a leading housing association could signal a change of sentiment.
FizzyLiving, a subsidiary of Thames Valley Housing Association, this month secured £60m of funding from Macquarie Capital (Europe), allowing the company to move towards owning 500 new-build flats in the private rented sector within two years.
If everything goes to plan, Macquarie and FizzyLiving will bring in £200m to £300m of institutional investment, giving them the firepower to take the venture’s portfolio to 1,000 homes.
In other words, FizzyLiving could become the UK’s first institutionally backed, large-scale rental portfolio built from scratch – and a compelling response to the ‘build-to-let’ principles advocated in last year’s government-commissioned Montague Report on the housing crisis.
Even 500 flats would be a breakthrough. But the TVHA/Macquarie camp is confident that the additional institutional funding could come into play as early as this year.
Simon Berrill, senior adviser at Macquarie Capital (Europe), says: “The UK market is characterised by relatively low institutional investment in what Americans call multi-family residential. It is a bit of an aberration that we think can and should change.”
Macquarie backs Fizzy brand
He adds: “We’re backing Fizzy’s management, brand, development capability and its story, initially with our own capital and then to arrange long-term capital for it to become a major provider – for the tenants, of good-quality living space, and for investors, of a good-quality, long-term investment.”
The reference to US multi-family housing is appropriate. Like the established US multi-family housing model, FizzyLiving’s formula involves new-build apartments, albeit aimed not at families, but young professionals in London and the south-east.
Typically these ‘rentysomethings’, as FizzyLiving calls them, are 25-35-year-olds earning too much to qualify for social housing but not enough to save up for a deposit and a mortgage. The company claims such people will lap up rental accommodation managed by an experienced landlord with a long-term outlook on its investment.
TVHA has pumped £30m of equity into the venture and since its launch early last year FizzyLiving has bought two developments from housebuilders – 75 flats at ECf’s Vermillion project in Canning Town, east London, and 63 at Solum Regeneration’s Epsom Station scheme in Surrey. Tenants have already moved into Fizzy-branded flats in Canning Town, while marketing starts next month at Epsom. Macquarie’s £60m will be used to accelerate the acquisition of assets and development land.
Thames Valley uses Fizzy formula to boost social housing funding
With its FizzyLiving business, a key objective for Thames Valley Housing Association (TVHA) is to generate an income to invest in its core social housing programme. It is another sign of how housing associations have been forced to rewrite their business plans in light of dramatically reduced housing grants from central government.
Like many of its peers, TVHA has tapped the bond markets over the past few years – City investors like the stability of low-risk income from social housing, at least from the leading associations.
But that source of funding goes only so far, while the sector as a whole is subject to “lingering downside risks”, according to a December report from Moody’s. The ratings agency said the introduction of the single universal credit benefit this year could put pressure on revenue and warned that exposure to market volatility from floating-rate debt and hedging positions may strain cashflow further.
Moody’s also noted that associations increasingly rely on non-core commercial activities whose income is “less stable than traditional social housing letting. An inability to manage sales turnover and related cash-flow, leading to higher debt levels, would be credit negative.”
For associations such as Genesis, non-core meant a mixed-tenure development called Stratford Halo in east London that needed a government bail-out for construction to be completed this year.
This month Genesis agreed a £125m sale and leaseback of 401 of its Stratford flats to M&G Investments. Genesis will reportedly pay M&G about £7m a year, adjusted to the RPI, for 35 years and take responsibility for leasing and managing the flats.
Robert Kerse, Genesis’ executive director of resources, says this deal is more efficient than a bond issue, hailing Stratford Halo as the epitome of a build-to-let development in the wake of last year’s Montague Report on housing. “We see this as a model that we could roll out more widely,” he says. Genesis omits to say that the flats were originally planned for individual private sale on the open market.
TVHA, however, is creating a residential investment business from scratch, separate from its core holdings, while FizzyLiving stock will be built specifically to suit renters. No doubt investors and tenants will pay their money and take their choice.
By any measure, it has been a very fruitful first year for FizzyLiving, the brainchild of chief executive Harry Downes, a former senior director of CBRE. Before that, he was sales and marketing director of developer Manhattan Loft Corporation, a pioneer of central London loft-style living in the 1990s.
Downes acknowledges that the management role of TVHA and its balance sheet strength are pivotal to FizzyLiving’s success. TVHA owns and manages 14,000 homes across the south east.
Downes says that funding talks with Macquarie’s Berrill started as early as last May. But the Fizzy formula has also resonated in government circles. In September, housing minister Mark Prisk referred to FizzyLiving in a post-Montague Report speech to the National Housing Federation’s annual conference.
The positive story in the City, and possibly Whitehall too, is not the Fizzy branding so much as the economies of scale TVHA can bring to the management of 500-1,000 private flats. Its housing association status is also important, as it allows some services to be provided free of VAT. TVHA believes such tax efficiencies will cut FizzyLiving’s management costs by 8%, offering investors an internal rate of return of at least 15%.
As a former chairman of social landlord One Housing Group, Berrill says he “instinctively saw the story. It’s a very good model and institutional investors know well-run housing associations are extraordinarily careful about reputational risk, as well as financial and other risks, which has worried them when investing in the [private housing] sector. We see the Fizzy model as being particularly attractive to investors.”
Macquarie Capital’s backing is also a major boost for a fledgling company. The Macquarie Group is one of the world’s leading housing financiers, having arranged more than £5bn of private and listed capital for residential developers and managers since 2007.
The group arranged last year’s biggest London private rented residential deal, bringing Residential Land into partnership with Canada’s Ivanhoé Cambridge and New York-based Apollo Global Real Estate Management.
“The UK market is characterised by relatively low institutional investment in multi-family residential. It is a bit of an aberration that we think can and should change” Simon Berrill, Macquarie
But Residential Land is a prime property play, as opposed to FizzyLiving’s suburban build-to-let proposition, which is arguably much more of a leap of faith for investors.
“We see the need for further supply in the UK, particularly London and the south east, of housing generally, but rental housing in particular,” says Berrill. “We come at it from a financial point of view but it is also a reasonably high-profile political issue.”
Berrill is confident that the institutional scale of FizzyLiving’s projected portfolio will attract mainstream investors, probably with debt involved, but possibly purely equity too.
“Quite a few investors with pure fixed-rate-plus-inflation exposure are happy to do a debt piece,” he says. “Other investors, such as pension funds, have what is effectively earnings-based exposure. Exposure to residential investment – which has a better correlation to earnings growth than most other asset classes – suits them pretty well. Many of them say: ‘We don’t want that return to be, if you like, contaminated by leverage’.”
He adds: “The big pools of capital – people who write £100m to £200m cheques – generally do not want to go into blind pool discretionary fund structures. They want some discretion over where their fund goes. They continue to want some control and the capacity to exit.”
Institutional interest is international
“The most likely capital to back Fizzy will be large-scale institutional investors, which could come to London and the south east from, frankly, almost any part of the world, including domestic investors. They will be attracted to the quality of the assets that the platform can acquire or develop.”
Berrill says that in the past three years, UK institutions’ attitude to residential property generally has shifted significantly from the traditional indifference and concerns over perceived management hassles.
He adds: “The difficulty for institutional investors is that there is very little to invest in of institutional quality and scale; there are relatively few platforms to back; and they do not have in-house [management] capability. Whatever anyone does, none of those things will change quickly, but I think they all will change over time.”
In the meantime, the field is open for FizzyLiving and its backers. Whether they will be a catalyst for change remains to be seen.
Mod cons are a must on housing association’s wish list
FizzyLiving plans to develop its own stock eventually, but in the short term is approaching housebuilders with the aim of buying as many as 100 one-, two- and three-bedroom flats in single housing schemes, to help create a mini community of renters in each location.
The company requires bedrooms to be the same size in two- and three-bedroom flats, to ensure equality for the tenants. All two-bedroom flats must have two bath/shower rooms.
New-build housing means new appliances and all mod cons, including an intranet site designed to simplify the provision of services to tenants. Logging into their account will give them instant access to both in-house management information, including the base rent, furniture rent, phone and broadband packages, as well as links to local businesses and services offering deals and discounts to the residents.
Every building will have a manager/supervisor always available either face to face or via phone/email, to sort out problems and maintenance issues.
All of which comes under the Fizzy brand, which is promoted through social networking sites rather than conventional property advertising.
And the rent? The company launches its Epsom flats next month with assured short-hold tenancies ranging from £900 a month for a one-bedroom flat to £1,200 a month for two bedrooms. But as FizzyLiving wants its ‘rentysomethings’ to stay as long as possible, discounts will be offered for longer-term tenancies.