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Housing Delivery Models
Chaired by Stephen Pearson
Partner (Freeths)
Matthew Grocock (Freeths - Real Estate), Steven Smith (Bevan Brittan), Mark Wells(Aviva)
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Timetable
• 9.45am – 10:00am (Introduction and Background) – StephenPearson
• 10:00am – 10:45am (Delivery Models) – Steven Smith, BevanBrittan
• 10:45am – 11:15am (Procurement Issues / “One We Did Earlier”The RCT Experience) – Stephen Pearson
• 11:15am – 11:30am (Coffee Break)
• 11:30am – 12:00pm (Guest Speaker) – Mark Wells, Aviva RealmFund
• 12:00pm – 12:30pm (The Greensquare Project / Housing &Planning Act) – Matthew Grocock
• 12:30pm – 12:45pm (Q&A Session)
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Introduction - Background toHousing Problems
• Affordability Gap
• Downgrading of RSL credit ratinghttp://www.wmhousing.co.uk/upload/public/Documents/Corporate/Investors/Credit-rating/17-5-13-English_Housing_Associations_Press_Release.pdf
• “Right to Buy” being extended to RSL tenants
• Rent controls
• Housing benefit, restricted LHA levels
• Net migration at all time high 330,000? 500,000?
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Trends in Affordable Housing 2005-2015
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Trends in Affordable Housing 2005-2015
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Trends in Affordable Housing 2005-2015
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ALMOs
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Today’s trends
• Direct delivery (eg Telford Housing)
• Partnerships
8
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The results are …
9
Any questions?
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Joint Venture Delivery Models
Steven Smith, Partner
Bevan Brittan LLP
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What will we cover?
Options for Local Authorities to deliver housing:
• Direct delivery
• Land sales
• Contractual engagement with a developmentpartner
• Contractual joint ventures
• JV Company structures
• Procurement-Faraday -v- West Berkshire Council
• Housing Zone funding
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Direct delivery (1) – outline ofstructure
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Direct delivery (2)
Key features:
• Procurement required (EU procurement if overthreshold – currently £4,592,704.79 (€5,225,000))
• Resource required
• LA takes disposal risk
• No "middle man" developer
• LA has greater control over eg. timing and what isdelivered
• Can lead to significant returns but only after cost andsales risk
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Direct delivery (3)
• This model is still not very common for housingdelivery
• BUT some examples:
– Lambeth (direct delivery)
– Barnet (direct delivery)
– Ealing (infrastructure)
• Useful where the market won't intervene at all, orwhere risk might be high, delaying delivery
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Land Sales (1)
A) Land Sale Outline of Structure
LandThe Council Buyer/ Developer
Price
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Land Sales (2)
Key features:
• If no development/services obligations, generally noEU procurement required
• S.123 Local Government Act 1972, s.127 LocalGovernment Act 1972, s.233 Town and CountryPlanning Act 1990
• Sale of Land Guidelines
• Generally should not include development obligations(so limited control)
• Buyback rights
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Land Sales (3)
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Contractual engagement withDevelopment Partner (1)
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Contractual engagement withDevelopment Partner (2)
Key features:
• Procurement required (EU procurement, if over EU threshold – currently£4,104,394 (€5,225,000))
• Access to developer expertise/resource
• Access to private funding
• Reduced control over content and timetable, BUT can be protected by:
– conditions precedent, including availability of development funding
– development approval rights (beyond planning)
– deferred grant of land interest
– if public funding is contributed, stage payments against delivery
– development programme/milestones
– step-in/termination rights
• Protections to be balanced against fundability
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Contractual joint ventures (1)
Procurement of Works/Services toProvide Infrastructure/Development(including Development services)
LandParcel
1
LandParcel
2
LandParcel
3
LandParcel
4
LandFunding
JV Agreement(Non Corporate)
The Council Investor
Land Value andProfit Share
Return oninvestment and
profit share
Saleproceeds
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Contractual joint ventures (2)Integrated Joint Venture – Investor Partner
Integrated JV Agreement (Non-Corporate) –(direct development and/or passing
developments to the market post-planning)
LandParcel
1
LandParcel
2
LandParcel
3
LandParcel
4
Landvalue and
profitshare
The CouncilDevelopment
Partner
Land andpotentially
fundingProfit
share andDM Fee
Funding +DM
services(resources
&expertise)
Saleproceeds
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Contractual joint ventures (3)
• Distinguish developer partner delivery
• Key features
– EU procurement may not be required if JV partner does notprovide works or services
– Public and private partners share risk
– LA has more influence throughout the development's life
– Facilitates private funding
– Often (but not always) 50/50 contributions
– Property ownership
(Continued)
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Contractual joint ventures (4)
• Key features (continued)
– Access to development expertise but may requiresignificant Council resource (at both junior andsenior level)
– Can generate greater returns for the authority
– Reputation risk
– No limited liability
– Tax transparency
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JV Company structures (1)
A multi-site Joint Venture Company structure:
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JV Company structures (2)
JV Company – key features:
• Vehicle – limited liability LLP
• 50/50 shareholding and deadlock
• Matched equity stakes – land and cash
• Finance – mezzanine and senior debt
• JV control over development and delivery
• No exclusivity (but 10 – 20 year arrangement)
• Working capital as and when required
(Continued)
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JV Company structures (3)
JV Company - advantages :
• Incentivises private sector to deliver over time
• Leveraging private sectors skills• Economies of scale and potential cross-subsidy• Long term returns potential – share in development uplift• Private sector covenant and market credibility• Deadlock enables public sector to block unacceptable
proposals• Control through business plan and site plans• Future projects not subject to OJEU or EU procurement• JV can shape local KPIs and meet wider LA objectives• Lower procurement time and cost implications
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JV Company structures (4)
JV Company – challenges:
• Critical mass and low land values
• Loss of public sector control (in traditional context)
• Deadlock could lead to breakdown
• Sale of private sector interest
• Resource commitment – time and cost
• Up front procurement
• Political perception – sale of family silver
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Procurement-Faraday/WestBerkshire decision• Effect of Brexit
• R (Faraday Development Limited) -v- West BerkshireCouncil
• Agreement between Council and St Modwen for StModwen to acquire site in lots
• No obligation for St Modwen to take transfer/do works
• Compliance with s.123 Local Government Act 1972
• Agreement not within Public Contracts Regulations2015
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Housing Zone funding (1)
• Housing Zones – "…areas where we can speed up and simplifythe process of house building on brownfield land through locallyled partnerships."
• London has started with their prospectus
• There is enough brownfield land to deliver up to 200,000 newhomes across the country
• Focus on partnerships between local authorities, government anddevelopers with everyone contributing
(Continued)
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Housing Zone funding (2)
• £600 million already available in London
• £6.4 million of Housing Zone funding allocatedacross England, further funds to becomeavailable in due course
• Involves working with a private sector developer
• Designed to ease housing pressures
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Housing Zone funding (3)
• Practical examples of its application:
– Accountable body
– Engagement with private sector partner
– Governance
– Required outputs
– Sanctions
“One We Did Earlier”The RCT Experience
Stephen Pearson
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RCT Homes
• Largest social housing provider in Wales
– Poor quality housing
– Issues with damp, subsidence etc
– Low property values – terraced houses for£40,000!
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Issues common to RSLs
• Reluctance of banks to lend
• Difficult financial covenant
• Ambivalent attitude of Las
• Limitations on rent / housing benefits
• Restrictions on type of tenancy
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Procurement issues?
• Commissioning of properties = Public WorksContract?
• Finance? – Probably not (Regulation 10.1(e)(f)PCR 2015)
• Creating new JVCo – probably not
• JVCo not a Teckal company / public body?
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The RCT solution …
• Procurement of a joined-up framework solution,contractors and funders – led by Bellerophon
• Finance provider – Legal & General Pension Fund(comparable with PWLB rates)
• Joint venture company “Porthcwlis” formed withdevelopment partner
• JVCo develops a range of properties includingWaterside flats / townhouses in Cardiff Bay
• Cross-subsidy into JVCo
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Structure of deal (1)
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Porthcwlis
BellerophonHomes
JV LLP
RCT
Fund
RCT
Figurehead
Contractor
RCT
Freehold @ Cardiff
6 TownhousesFreehold
Guarantee
Building Contract
Operating lease37 years
250 yearleases
DevelopmentAgreement
Porthcwlis
Funder
1st Charge
2nd Charge
Funder
199 yearLease
Contractor /Guarantor
BellerophonServicesLimited
Professionals
CommissionsDevelopment
BuildingContract
Townhousedevelopment agreement
Cardiff Cwmbach
PCG
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Structure of deal (2)
• RCT → Funder 199 year lease
• Funder → RCT 37 year leaseback of site with properties
• Rent ↑ by CPI annually, take void risk
• Properties revert at end of 37 year terms
• Development managed by JVCo, townhousessold off to defray investment
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Pros & Cons of Structure
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Pros:
• “Fundable”
• “Replicable” – including by Las
• Cost control via L&G technical team
• Cross-subsidy improves investment
• “Security package” works
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Cons:
• Due diligence
• Risk of voids
• Risk of inflation:
– Commission
– warranties
Any questions?
This document is for Professional Clients, institutional/qualified investors and Advisers only. It is not to be viewed by or used with retailclients
AVIVA INVESTORS
RELI Housing Delivery
2016
CONTENTS
– AN INTRODUCTION TO AVIVA INVESTORS REAL ESTATE 3
– RELI FUNDS 4
– DEVELOPMENT FUNDING & DELIVERY STRUCTURE 5
– CASE STUDIES 7
For the investor
47
Specialists in real estateDelivering investment solutions on a global scale
Source Aviva Investors as at 30 September 2015
Peter Fitzgerald, Nick Samouilhan & Brendan Walsh - Lead Portfolio ManagersEd Casal CEO Global Real Estate
– Expertise across real estate sectors– Value enhancement capabilities– Liability driven to high return
outcomes– Investment professionals in
London, Paris, Frankfurt
Direct investments Asset management
– Sector specialist teams,– Deep expertise and value add to
portfolios
Indirect investment
– Private and listed equity and debtinvestments
– Investment professionals in NewYork, London, Paris, Amsterdam
and Singapore– Over 250 investment holdings
AUM £32/€44/$49 billion
Direct and indirect Offices in London
40 portfolio managers 28 asset managers 18 analysts and
strategists
UK
Direct and indirect Offices in Paris,
Frankfurt andAmsterdam
8 portfolio managers 3 asset managers
1 analyst
Europe North America
Indirect only Offices in New York 4 portfolio managers
Asia
Indirect only Offices in Singapore 4 portfolio managers
Global support – fund analysts, strategy and research, investment and business risk, finance andoperations, legal, compliance, client service, business and product development, HR, IT, project
management
Mandate Structures
– Segregated mandates– Joint Ventures
– Institutional Funds– Registered funds for retail and HNW
– Global, regional, single countrymandates
For the investor
Real Estate Long Income FundsAccess to multiple funds delivering loan capital from £10m to over £500m
48
LIME PROPERTY FUND REaLM FUNDS BESPOKE SEGREGATEDMANDATES
THE AVIVA PLC ANNUITYBUSINESS
• Created in 2004 for pensionschemes, as an alternative toinvesting in fixed income
• Target is to deliver a stablepredictable return in excess ofgilts
• Seek to reduce market riskthrough focussing on:
• Strong tenants (c 50%public sector)
• Long leases (over 20years average term)
• Inflation / Fixed upliftreviews (89%)
• Mature portfolio andcommitments of c £2 billioninvested across 69 assets
• Focus on long termrelationships not short termtrading
Aims to provide income streams fromdirect real estate that are a strongmatch to the liabilities of UK pensionfunds.
Four open-ended funds coveringCommercial Assets, Ground Rents,Social Housing and Infrastructure.
UK pension scheme investor base.
£1.7 billion raised to date.
Investment grade or equivalentcovenants.
Inflation linked leases i.e. RPI or CPI
Lease lengths of 25 years+
Preference for assets with no residualinterest or where the tenant has theright to buy back the property at theend of the lease for a nominal amount– “income strips”
All sectors considered including nontraditional commercial sectors.
• UK pension schemes
• c. £550 million
• Strong tenant covenants,preferably investment grade
• Lease lengths of 20 years+
• Inflation-linked and fixeduplifts / reviews
• All sectors consideredincluding non-traditionalcommercial sectors
Aviva plc has long been one ofthe UK’s largest annuitymanagers. Our Real EstateLong Income business provideslong-term, sterling-denominated, inflation-linkedincome to our annuity business.
Our annuity book targetslonger-dated transactions withleases of up to 50 years. Thesemulti-decade leases areespecially well suited tomatching long-term liabilitieslike those in an annuitybusiness.
For the investor
Development FundingFunding provided for developments broadly follows these steps:
49
Developer Partner achieves planning permission
Tenant enters into an agreement for lease
Aviva Investors Fund purchases freehold or long-leasehold
Aviva Investors fund the development and manage all construction risks
At the end of the lease, depending on the structure agreed, the Tenant can either:
Tenant enters into a lease at practical completion over the agreed term
Tenant can choose to sub let or occupy the asset
Walk away or extend the lease Purchase the freehold for £1
For the investor
Housing DeliveryStructure
50
ContractorCouncil (SPV)
Tenants
Agreement tolease & HeadLease once
developmentcompleted
Portion ofnet rental
income paidto Aviva
ManagementAgreement
Developmentand fundingagreement
Potential forcapital or rentfree incentive
Freehold purchase
Key:Contract
Rights on defaultPayment Flow
Management Support
Manager
Aviva Investors Step inrights
Staircasing/Sales
ASTs (right tobuy
considerations)
Receipts retained byCouncil. Security for Aviva
funding can either bysubstituted or we can set
up a staircasing timerestriction
CASE STUDY
For the investor
Transaction background
– Scheme currently in planning
– 1,800 units; 30% social, 20% affordable,
50% PRS
– Aviva Investors and others to fund a 6 year
build period
– At practical completion, a Council takes a
lease over all units. No risk is taken by the
Council during development
Funding
- Funding is structured to account for the fact
that no uplifts are expected in social rents
over time.
- This provides a lower blended expected
uplift in revenue, which we will match as a
funder.
Case studyLondon
Development funding and profit rent with a local authority partner
CGI of Stephenson Quarter, Newcastle
52
For the investor
Transaction background
– Scheme currently in planning
– 1,200 units; 55% affordable/social, 45% PRS
– Scheme includes community facilities and schools.
– Aviva Investors to fund a 3 year build period.
– At practical completion, a Council takes a lease over
all units. No risk is taken by the Council during
development
Funding
- Funding is structured with annual RPI uplifts.
- Term of 45 years from practical completion.
Case studyBedfordshire
Development funding and profit rent with a local authority partner
53
For the investor
Transaction background
– Scheme currently in discussion.
– Scheme designed at risk by Aviva partners.
– 100 units; 30% affordable/social, 70% PRS
– Aviva Investors to fund a 2 year build period.
– At practical completion, a Council takes a lease over
all units. No risk is taken by the Council during
development.
Funding
- Funding is structured with annual RPI uplifts.
- Term of 40 years from practical completion, with a
buy back provision at year 25.
- Co-investment model, where Council on lend into
the development at commercial rates.
Case studyAdur and Worthing
Development funding and profit rent with a local authority partner
54
For the investor
Established experience of public sector investment
55
The Greensquare Project
Matthew Grocock
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• REaLM Social Housing Fund
(Return Enhancing and Liability Matching)
• Lease & leaseback with Derwent HA September 2011
• Greensquare: December 2012
• Cosmopolitan HCA Rescue 2012/2013
Background
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Greensquare
• Registered Provider of Social Housing
• Registered with the HCA
• Oxfordshire, Wiltshire & Gloucestershire
• Increase by 2,000 properties by 2025
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Acquisition
• From Guinness
• Instructed on Purchase April/May 2013
• Acquired 191 properties & Family Centre
• General Needs Housing
• L&LB of 178 social rented properties
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Funding
• Headlease for 125 years at a Premium
• Sublease –min 34 years -at an annual rent
• Sublease term to fit the financial model
• Rent increase -RPI or CPI
• Provision for substitution of units
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Issues arising
• 172 Housing & Regeneration Act 2008
–consent from regulator –more scrutiny
• S106 Agreements –MiP clauses
• Nominations Agreements –not to be binding onfunder
• Certificates of Title
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Structure
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Funding for Councils
• ASTs
• Right to Buy –substitution?
• SDLT
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Other Structures
• Building –long lease to Company or LLP?
• Company Limited by Shares if a JV Partner
• VAT –Golden Brick –concessionary by HMRC
• Corporation Tax –specific advice needed
• SDLT –lease at a peppercorn? –valuation
• Disapplication of VAT election –issue for theseller
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Question
Housing and Planning Act 2016
• S3 –Promote development of Starter Homes
• Right to Buy –Housing Association tenants
• Pay to stay -£30k/£40k
• Government emphasis on home ownership
• Shortage of affordable homes for rent
• Secure affordable homes for ordinary people?
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Questions for the Panel?
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Check out the website …
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EM LawshareConference 2016
Friday 14th October 2016Holywell Park, Loughborough
Book now: www.geldards.com/emls