Affordable Rent
Supporting Older People Conference
RC8: Affordable rent – what’s the story? Speakers:
Richard Petty Director, Residential Jones Lang LaSalle
Paul Stevens Head of Housing Finance Santander Corporate Banking
Chair:
Kate Allen Editor Social Housing Magazine
Affordable Rent What’s the Story?
NHF Finance Conference Warwick, 21 March 2012
Richard Petty Director & Head of Affordable Housing, Jones Lang LaSalle and Chair, Richmond Housing Partnership Paul Stevens Head of Housing Finance, Santander
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
4
What basis of valuation should we use? • Valuers only have two real choices: - Existing Use Value for Social Housing (EUV-SH) - Market Value, subject to Tenancies (MV-T)
• EUV-SH - Stock sold to RP; remains let as regulated social housing in perpetuity
• MV-T - Stock sold outside regulated sector; rents increase to market levels - Value maximised through sales
• How do these sit with Affordable Rent?
5
EUV-SH – What is the definition? • Hypothetical sale, completing on the date of valuation • Willing seller, willing buyer • Arm’s length transaction
• Regulator would approve sale (“not unreasonably fetter”) • On-going management in accordance with regulator’s requirements • Voids would be let at affordable (regulated) rents • Any future sale subject to all the same assumptions
6
EUV-SH – applicable to Affordable Rent? • Hypothetical sale, completing on the date of valuation • Willing seller, willing buyer • Arm’s length transaction
• Regulator would approve sale (“not unreasonably fetter”) • On-going management in accordance with regulator’s requirements • Voids would be let at affordable (regulated) rents • Any future sale subject to all the same assumptions • But there are some practical difficulties….
7
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
8
Example valuation cashflows • Flat 5, Bliss Mews, Uxbridge, London UB8 • 2-bedroom flat • Market Value £200,000 • Social rent: £100 per week • Market Rent: £205 per week (£890 pcm)
• Affordable Rent: £164 per week (80% of MR) • LHA cap: £207.69 per week
9
1. EUV-SH – social rent EUV-SH £71,000
7,000 6,000
Rent/Costs (pa)
5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Rent (pa)
Costs (pa)
10
Rent/Costs (pa)
2. EUV-SH with future AR tenancies 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
EUV-SH £110,000
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Rent (pa)
Costs (pa)
11
3. EUV-SH - AR with future shift to social rent EUV-SH £82,000
12,000 11,000 10,000 9,000 Rent/Costs (pa)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Affordable Rent (pa)
Affordable Rent Costs (pa)
Social Rent (pa)
12
4. EUV-SH - AR from day 1 but assume social rent EUV-SH £71,000
12,000 11,000 10,000 9,000 Rent/Costs (pa)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Affordable Rent (pa)
Affordable Rent Costs (pa)
Social Rent (pa)
13
5. MV-T under social rent and AR MV-T £135,000
16,000 14,000
Rent/Costs (pa)
12,000 10,000 8,000 6,000 4,000 2,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Affordable Rent (pa)
Costs (pa)
Social Rent (pa)
14
Risk profile of lending against social housing
Element
EUV-SH Social Rent
EUV-SH Affordable Rent
MV-T
Rental income Rental growth Risk to income Operating costs House prices
n/a
Underlying demand Overall risk
15
Risk profile of lending against social housing
Element
EUV-SH Social Rent
EUV-SH Affordable Rent
n/a
n/a
MV-T
Rental income Rental growth Risk to income Operating costs House prices Underlying demand Overall risk
16
Risk profile of lending against social housing
Element
EUV-SH Social Rent
EUV-SH Affordable Rent
n/a
n/a
MV-T
Rental income Rental growth Risk to income Operating costs House prices Underlying demand Overall risk
17
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
18
HCA investment contracts – not a level playing field
Output of new homes (mixed tenure programmes)
Value for money
Percentage of market rent
Grant rate per unit
Proportion of relets / ceiling
19
Playing to different rules • EUV-SH = the market between (or to) RPs • Valuations must reflect the real market
• Investment contracts do NOT flow with the land
20
Is there a market? • No transactional evidence so far
• But still early days • Proven market in tenanted stock on EUV-SH basis • Average realisation circa 50% over book value • Good reasons (and some hidden agendas) • Attractive to RPs – growing market
• But what are you buying with AR?
21
4. EUV-SH - AR from day 1 but for how long? Affordable Rents not formulaic – adds layer of uncertainty for funders
12,000 11,000 10,000 9,000 Rent/Costs (pa)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Affordable Rent (pa)
Affordable Rent Costs (pa)
22
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
23
England & Wales - Transactions Land Registry
Number of transactions in year to date
1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000
Source: Jones Lang LaSalle, Land Registry
Oct 10
Oct 08
Oct 06
Oct 04
Oct 02
Oct 00
Oct 98
Oct 96
0
A Polarised Market Transactions have been most robust in the south and particularly in rural areas – as well as London Price changes follow a similar pattern Market has moved to those who have equity or access to it: • • • •
Older outright owners Families and older movers FTBs with rich parents International investors
Source DCLG / Jones Lang LaSalle
The Fundamental Problem Mortgages and Funding 1,600,000
100 90 80
1,200,000 70 1,000,000
60
800,000
50 40
600,000
30 400,000 20 200,000
10
Actual
Forecast
Average LTV (RHS)
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0 1996
0 1995
Number of mortgage approvals in year to date
1,400,000
Source: Bank of England
Structural shift in housing tenure
Source : Jones Lang LaSalle
27
Recent Rental Performance… 30%
Annual increase in average rents
25% 20% 15% 10%
5% 0% -5% -10%
UK annual increase
London annual increase
Source:
Political threats to established order
29
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
30
Paul Stevens Head of Housing Finance, Santander
Housing Benefit
Grant Subsidy
Fully Secured
Robust Regulation
Private Finance: The Four Pillars
Historic risk mitigation with significant revenue and capital support from Government
Affordable Rent: A Lender’s Perspective Overview • The sector risk profile is increasing – with greater differentiation between RPs.
• Affordable Rent introduces market and political risk dynamics • What is the long term vision and strategy for housing in the UK? • 2 strands to Affordable Rent properties as security: • Relet of existing charged property
• Utilisation for new / additional borrowing
Key Considerations • Valuation Report
• Geographic Location • Relative Exposure to Affordable Rent • Impact on Lending Terms
• Development Model & Market Evolution
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
34
Key points • Real practical difficulties in valuing and lending against Affordable Rent • Untested asset class • Greater risk than social rent – funders will assess terms accordingly • Social rent providing security for current programmes • Most lending continues to be secured on MV-T
• Affordable Rent remains a sideshow for now • Bigger challenges looming – market, political and economic • The sector does not have unlimited financial capacity • But approaches will evolve – work with your lenders and valuers
35
Affordable Rent – What’s the Story? Questions
NHF Finance Conference Warwick, 21 March 2012
RC8: Affordable rent – what’s the story? Speakers:
Richard Petty Director, Residential Jones Lang LaSalle
Paul Stevens Head of Housing Finance Santander Corporate Banking
Chair:
Kate Allen Editor Social Housing Magazine
Affordable Rent What’s the Story?
NHF Finance Conference Warwick, 21 March 2012
Richard Petty Director & Head of Affordable Housing, Jones Lang LaSalle and Chair, Richmond Housing Partnership Paul Stevens Head of Housing Finance, Santander
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
4
What basis of valuation should we use? • Valuers only have two real choices: - Existing Use Value for Social Housing (EUV-SH) - Market Value, subject to Tenancies (MV-T)
• EUV-SH - Stock sold to RP; remains let as regulated social housing in perpetuity
• MV-T - Stock sold outside regulated sector; rents increase to market levels - Value maximised through sales
• How do these sit with Affordable Rent?
5
EUV-SH – What is the definition? • Hypothetical sale, completing on the date of valuation • Willing seller, willing buyer • Arm’s length transaction
• Regulator would approve sale (“not unreasonably fetter”) • On-going management in accordance with regulator’s requirements • Voids would be let at affordable (regulated) rents • Any future sale subject to all the same assumptions
6
EUV-SH – applicable to Affordable Rent? • Hypothetical sale, completing on the date of valuation • Willing seller, willing buyer • Arm’s length transaction
• Regulator would approve sale (“not unreasonably fetter”) • On-going management in accordance with regulator’s requirements • Voids would be let at affordable (regulated) rents • Any future sale subject to all the same assumptions • But there are some practical difficulties….
7
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
8
Example valuation cashflows • Flat 5, Bliss Mews, Uxbridge, London UB8 • 2-bedroom flat • Market Value £200,000 • Social rent: £100 per week • Market Rent: £205 per week (£890 pcm)
• Affordable Rent: £164 per week (80% of MR) • LHA cap: £207.69 per week
9
1. EUV-SH – social rent EUV-SH £71,000
7,000 6,000
Rent/Costs (pa)
5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Rent (pa)
Costs (pa)
10
Rent/Costs (pa)
2. EUV-SH with future AR tenancies 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
EUV-SH £110,000
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Rent (pa)
Costs (pa)
11
3. EUV-SH - AR with future shift to social rent EUV-SH £82,000
12,000 11,000 10,000 9,000 Rent/Costs (pa)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Affordable Rent (pa)
Affordable Rent Costs (pa)
Social Rent (pa)
12
4. EUV-SH - AR from day 1 but assume social rent EUV-SH £71,000
12,000 11,000 10,000 9,000 Rent/Costs (pa)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Affordable Rent (pa)
Affordable Rent Costs (pa)
Social Rent (pa)
13
5. MV-T under social rent and AR MV-T £135,000
16,000 14,000
Rent/Costs (pa)
12,000 10,000 8,000 6,000 4,000 2,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year
Affordable Rent (pa)
Costs (pa)
Social Rent (pa)
14
Risk profile of lending against social housing
Element
EUV-SH Social Rent
EUV-SH Affordable Rent
MV-T
Rental income Rental growth Risk to income Operating costs House prices
n/a
Underlying demand Overall risk
15
Risk profile of lending against social housing
Element
EUV-SH Social Rent
EUV-SH Affordable Rent
n/a
n/a
MV-T
Rental income Rental growth Risk to income Operating costs House prices Underlying demand Overall risk
16
Risk profile of lending against social housing
Element
EUV-SH Social Rent
EUV-SH Affordable Rent
n/a
n/a
MV-T
Rental income Rental growth Risk to income Operating costs House prices Underlying demand Overall risk
17
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
18
HCA investment contracts – not a level playing field
Output of new homes (mixed tenure programmes)
Value for money
Percentage of market rent
Grant rate per unit
Proportion of relets / ceiling
19
Playing to different rules • EUV-SH = the market between (or to) RPs • Valuations must reflect the real market
• Investment contracts do NOT flow with the land
20
Is there a market? • No transactional evidence so far
• But still early days • Proven market in tenanted stock on EUV-SH basis • Average realisation circa 50% over book value • Good reasons (and some hidden agendas) • Attractive to RPs – growing market
• But what are you buying with AR?
21
4. EUV-SH - AR from day 1 but for how long? Affordable Rents not formulaic – adds layer of uncertainty for funders
12,000 11,000 10,000 9,000 Rent/Costs (pa)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Affordable Rent (pa)
Affordable Rent Costs (pa)
22
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
23
England & Wales - Transactions Land Registry
Number of transactions in year to date
1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000
Source: Jones Lang LaSalle, Land Registry
Oct 10
Oct 08
Oct 06
Oct 04
Oct 02
Oct 00
Oct 98
Oct 96
0
A Polarised Market Transactions have been most robust in the south and particularly in rural areas – as well as London Price changes follow a similar pattern Market has moved to those who have equity or access to it: • • • •
Older outright owners Families and older movers FTBs with rich parents International investors
Source DCLG / Jones Lang LaSalle
The Fundamental Problem Mortgages and Funding 1,600,000
100 90 80
1,200,000 70 1,000,000
60
800,000
50 40
600,000
30 400,000 20 200,000
10
Actual
Forecast
Average LTV (RHS)
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0 1996
0 1995
Number of mortgage approvals in year to date
1,400,000
Source: Bank of England
Structural shift in housing tenure
Source : Jones Lang LaSalle
27
Recent Rental Performance… 30%
Annual increase in average rents
25% 20% 15% 10%
5% 0% -5% -10%
UK annual increase
London annual increase
Source:
Political threats to established order
29
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
30
Paul Stevens Head of Housing Finance, Santander
Housing Benefit
Grant Subsidy
Fully Secured
Robust Regulation
Private Finance: The Four Pillars
Historic risk mitigation with significant revenue and capital support from Government
Affordable Rent: A Lender’s Perspective Overview • The sector risk profile is increasing – with greater differentiation between RPs.
• Affordable Rent introduces market and political risk dynamics • What is the long term vision and strategy for housing in the UK? • 2 strands to Affordable Rent properties as security: • Relet of existing charged property
• Utilisation for new / additional borrowing
Key Considerations • Valuation Report
• Geographic Location • Relative Exposure to Affordable Rent • Impact on Lending Terms
• Development Model & Market Evolution
Agenda • Basis of valuation for Affordable Rent • Impact on income streams • Challenges to realising value
• Does it really matter? • Funder’s perspective • Summary
34
Key points • Real practical difficulties in valuing and lending against Affordable Rent • Untested asset class • Greater risk than social rent – funders will assess terms accordingly • Social rent providing security for current programmes • Most lending continues to be secured on MV-T
• Affordable Rent remains a sideshow for now • Bigger challenges looming – market, political and economic • The sector does not have unlimited financial capacity • But approaches will evolve – work with your lenders and valuers
35
Affordable Rent – What’s the Story? Questions
NHF Finance Conference Warwick, 21 March 2012
