Most build-to-rent schemes in the city are being forward funded by investors looking to establish PRS platforms, but more debt financing is coming, reports Jane Roberts.
Eyecatching new figures, compiled by the British Property Federation, demonstrate the degree to which the nascent UK institutional PRS (private rented sector) is beginning to spread beyond the country’s capital. A year ago the pipeline of PRS homes in UK regional cities was a mere 7,000. One year on, in October 2016, the figure had jumped by almost 400 percent to 34,000 as opportunities, capital and confidence start to come together to kickstart a true UK multi-family sector.
The city way out in front in terms of pipeline is Manchester. The northern city has the demand demographic which makes it a natural first target for institutions and other investors looking to invest in PRS in scale and expand out of greater London, as Steven Verity, Manchester-based senior director in land and development at CBRE, explains. “Manchester has a broad spectrum of diverse renters and you have one of the highest student-retention rates of any university in the country,” he says. “So the rental market keeps getting fed.”
The city is also a growing regional cultural and media centre, with the BBC helping to pull investment into Salford and out to Salford Quays, on Manchester’s western side. Rather like London, Verity says, the city is seeing “a number of various small zones and pockets around the CBD which tend to be hotspots for renters.”
Investors in the project widely recognised as the first large-scale build-to-rent development in Manchester, Greengate, agree.The 497 flats on the north-west edge of the centre next to Victoria station are being developed by Renaker Developments, an established regional residential specialist run by Daren Whittaker. The capital to launch the scheme was a £35 million injection of public debt from the Homes & Communities Agency Build to Rent fund and the Greater Manchester Housing Investment Fund, secured in early 2015. This year, Renaker sold Greengate for £110 million to Lasalle Investment Management, and the completed first phase of 229 apartments is said to be letting up briskly. Andrew Stanford, UK residential fund manager at LaSalle Investment Management said that “the depth of the tenant market is one of the reasons that Manchester and Salford rank so highly in our multi-factor PRS model.”
Viable asset class
Demand from investors with deep pockets – institutions like LaSalle, and overseas and sovereign wealth money – is driving the opportunity for developers to deliver large schemes in the city – and there are a lot proposed or already in the pipeline. These investors, keen to access the asset class and benefit from the stable income, are in the very early days of building up PRS platforms and they want efficiencies of scale. So, for large projects, forward-funding is the dominant source of funding capital.
“It’s amazing how far we’ve come in a short time,” Verity says. “Ten years ago funds wouldn’t consider residential; now PRS is considered as a use class in its own right, partly because student accommodation has become a viable asset class for institutions.”
Developer demand for debt finance as an alternative to forward-fundings to build out rental schemes is starting to emerge from a number of quarters: one is the sub-£50 million gross development value projects which are slightly small for some institutional investors, says Verity’s debt advisory colleague, regional director Victoria Hill.
Or, as in the case of Moda Living and its equity partner Apache Capital, it might be a case of well-capitalised sponsors using debt in order to spread available equity across a wider portfolio of schemes, faster.
Moda, owned by the Caddick Group, and Apache, the gulf-backed investment firm, have ambitious plans to build up a 5,000-unit, purpose-built private rented sector portfolio in regional conurbations. In the last 18 months it has announced projects in Manchester, Birmingham and Liverpool and is believed to have secured another three or four sites to be unveiled shortly.
The pair have been seeking about £80 million of construction finance for Angel Gardens, its furthest advanced PRS development, located on part of the Co-op and Hermes’ 20-acre Noma site bordering Manchester’s Northern Quarter. Featuring top-end design and amenities, renters will be able to enjoy a rooftop garden and cinema, restaurant, sports court and comprehensive range of concierge services, and the investors have given over about 40,000 – 50,000 sq ft of the scheme’s space to these facilities.
Sources of debt
Larger debt tickets, £30 million-plus, are attractive to private equity-backed debt funds with lean teams who like to put out large loans, Hill says. “They are typically looking to invest higher up the risk curve, maybe 65 percent or up to 75 percent gross development cost, ideally whole loans, for returns in the high single-digit margins”. UK clearers, on the other hand, are cheaper, but more conservative and in the current market are unlikely to go above 55-60 percent loan to cost, and have stringent requirements about cost overruns and recourse for residential development.
There are debt fund lenders, like PGIM Real Estate and M&G, which have the ability to make some development loans within existing funds so that they can lend without a running return on those deals; another structure for debt fund managers is lending via bespoke co-investment deals with one or more of their investors.
Small to medium-sized projects are much more likely to be funded either by a senior bank lender or what Hill calls “an emerging product, which is 75 percent loan to gross development cost, and it’s coming from challenger banks and some peer-to-peer lenders: they are very hungry for residential development.” While the former might lend at a 3-4 percent cost the later model is based on a higher 5-6 percent return for the lender. “In the regions that works. Assuming there’s sufficient profit in the scheme they will lend at that LTC to get that return.”
Active lenders at higher LTCs include Secure Trust Bank, Arbuthnot Latham and Assetz.
So far there have been very few PRS debt financings closed outside London. But there are lenders which have backed experienced operators on regional student housing projects, and where these developer-operators are expanding into PRS it seems fair to assume that their lender relationships might expand with them.
An example is Lloyds and Wells Fargo which provided £108 million of senior, and PGIM Real Estate £61 million of junior, debt in June to Select Property Group’s Vita Student business; Select has also built up a Manchester PRS pipeline of nearly 2,000 units via its Affinity Living brand. And PGIM Real Estate has been a close relationship lender to Allied London on its Spinningfields office district in the city: Allied London’s next huge project is the nearby St John’s Quarter on the former Granada TV studio site. The developer is said to be about to bring St John’s extensive PRS element to the market in a search for funding.
“The market has shifted from being forward-committed only, without debt as an option, to at least looking at debt. It’s forward-commit, forward fund, or debt finance as a recognised option,” Hill says. “And while there have been few debt financings of PRS yet, it’s certainly on the radar and the lender appetite is there.”
Click here to view a table of Manchester’s PRS pipeline.