Urban Exposure, the UK-based provider of residential development finance, has launched a listing on the London Stock Exchange’s junior Alternative Investment Market.
The firm, which is led by CEO Randeesh Sandhu, is aiming to raise £150 million (€170 million) through the IPO, which would put its market cap at £165 million on admission, expected to take place on 9 May. Institutions that have invested in the IPO include Invesco, BlackRock and Aberdeen Standard.
Former Deutsche Bank credit risk analyst Sandhu co-founded Urban Exposure in 2002 as a development company, before it evolved to become a lender and asset manager of third-party capital. Real Estate Capital caught up with Sandhu on the launch of the IPO.
Real Estate Capital: What is the rationale behind going public?
Randeesh Sandhu: It gives us a balance sheet to complement our third-party asset management business. It will enable us to continue our strategy; providing development finance for SME developers around the UK. We manage commingled funds, separate accounts and managed accounts, so the listing will provide us with an additional pool of capital. We are the only UK-listed lender which specialises solely in residential development finance.
REC: Why now?
RS: We align ourselves with the government’s housing strategy, especially since it launched its white paper to deliver 300,000 homes per year in the UK. The housing supply problem is growing year-by-year, so we want to play a role in alleviating it. We’ve calculated this market needs another £20.8 billion per year for the next decade, which is more than double the current market for development finance.
REC: How much capital do you currently manage?
RS: We have just less than £1 billion under management and we are in conversations to grow the asset management business. We are speaking to investors about coming into our next commingled fund, which is being lined up, as well as separate accounts. The asset management side of what we do is already larger than the balance sheet and we expect it to grow by multiples of what we are raising through the IPO.
REC: In 2014 you pulled plans for a £500 million IPO – what went wrong?
RS: It was a very different IPO – it was the listing of a debt fund within the asset management business. We were aiming to raise a blind pool of capital, but, unfortunately, we didn’t raise the full amount, so we had to withdraw. The strategy then was very different from today. We were focused on mezzanine loans in London and the South East, including to prime product, but the deeper market is for first-time buyers and young professionals across the UK. It was also a point in time where there was a rush of real estate IPOs, so there was an element of investor fatigue. Timing went against us. However, those investors that were interested did private deals with us, so we raised capital through the strategy, just not through a listed vehicle.
REC: Will your product offering change?
RS: We write loans as small as £1 million and we don’t have a maximum because we can allocate significant capital through the third-party capital. A rough ballpark for our loans is £20 million to £30 million, but by using our balance sheet alongside third-party capital we will not be constrained size-wise. The main consideration is that the developer is experienced. It doesn’t matter to us how big a firm they are, but they need a minimum 10-year track record.
REC: What returns can development lending generate?
RS: Rates are stable, although there was some downward pressure between 2012 and 2014. We provide a variety of lending – senior and stretched senior, which includes mezzanine – so there is no set pricing. Senior loans can have rates starting at 6 percent, while stretched senior can start at 8 percent, but pricing and returns depend heavily on how highly leveraged the development is, how many pre-sales there are, etc. Underwriting deals is labour intensive as each development project is bespoke, so pricing varies per loan.
REC: What do you see as the market opportunity?
RS: We call them domestic market units. What we mean is units located where young professionals and first-time buyers want to live – often town and city centres – at a price point they can afford. That differs from Bristol to Newcastle to London, but we’re talking schemes priced at £200 per square foot to £800 per square foot depending on which part of the country. Scheme value depends on factors including the local economy, demographics and the supply/demand imbalance. There are 10 million people renting today aged between 24 and 35, who are paying on average 40 percent more in rent than they would on a mortgage for the same property.
REC: Where do you stand on the emerging private rented residential sector?
RS: We provide capital for people to build housing and we want our loan to be redeemed at the end of the term, so if they want to sell to a private rented sector operator or retain the asset and become a PRS landlord, that’s fine.
REC: Does the growth of purpose-built PRS schemes address the country’s housing needs?
RS: The answer is yes and no. Renting can reduce peoples’ ability to save for a deposit if their rent is higher than a mortgage would be, which is increasingly the case, so it can exacerbate the problem. But the PRS market can also provide nice accommodation and amenities, which many people want. We are more in the market for those who want to own a home, but there are two different markets.
REC: Five years from now, where do you see the company?
RS: Five years from now, we aren’t going to have made a huge dent in the government’s target for new homes. Given the constraints in capital, planning, land and construction capacity, it is hard to see 300,000 homes being delivered per year. But hopefully we will have expanded our asset management arm – we’re likely to make new hires for this side of the business in the next six months – and a continuation of the type of lending we are already doing.