Terrace Hill courts partner to set up residential venture

Terrace Hill Group is in talks with a potential partner to set up an institutional residential fund, after refinancing its £236m residential portfolio with Lloyds Banking Group. The AIM-listed developer and investor has invested in residential since its flotation 14 years ago.

Terrace Hill bought the At.Home portfolio from Nationwide in 2006 and owns a 49% stake, while a company associated with Terrace Hill’s chairman, Robert Adair, owns the other 51%.

The portfolio has been measured by IPD for eight years since the residential index was set up and has always outperformed the benchmark. Jon Austen, finance director of Terrace Hill, said the group is in talks with an institutional fund manager to set up a joint venture.

“We have started soft marketing the fund and think institutions are interested in residential investment,” he said. Terrace Hill and the fund manager would co-invest. Several fund managers are exploring residential investment, including Aviva Property Investors, Legal & General and Paul Oliver’s new boutique, Curlew Capital.

The loan refinanced in the £208m deal with Lloyds matured in July 2009 and the new term is for three years; the blended margin is 280 basis points over Libor with 50% hedged through a cap. Austen’s team has negotiated a ‘back-ended’ 1% exit fee rather than paying an upfront arrangement fee.

Austen said: “This is still a high loan-to-value ratio, but we have a strategy for the assets to cover the interest, and the interest shortfall guarantees stay in place.” Since October 2008, Terrace Hill has refinanced £340m of loans and extended the average maturity to 30 months.