Do s and Don ts in Alternative Sectors

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1 National Bank of Kuwait (International) PLC Bassam Khazen Do s and Don ts in Alternative Sectors

2 Background & Context Gulf investors remain yield sensitive and often in search of income-driven Real Estate outside of the GCC Despite the absence of clear political leadership and the uncertainty associated with leaving the EU, the UK is still seen, quite rightly, as a stable destination for wealth preservation Uncertainty within the GCC and escalating tensions between member states only reinforce the belief many hold that capital must flow out of the region Relative to other global markets, many investors see value in the UK, particularly in commercial real estate which appears comparatively cheap. Major markets such as Paris, New York and of course Hong Kong, remain fully priced In addition to this, a weakened sterling offers even greater value particularly for dollar-denominated investors including those from the GCC who have benefitted from a 15%-20% discount in a prolonged low-rate environment So the question is: in order to take advantage of the macroeconomic landscape, which sector should be targeted in the UK?

3 Sectors While traditional office and retail markets in London and the big regional cities remain attractive due to liquidity and prestige, investors in search of yield have been looking elsewhere. This arbitrage can be found in alternative markets. The graphic below provides an overview: Alternatives Student Housing Care Homes Leisure PRS Self- Storage - Defensive in nature - Undersupplied - Attractive yields - Highly specialised - Operation is key - Long Leases - Covenant Strength - Demographics - Exit Strategy - Management is key - Scale is needed - Lower yields reflect use - Highly specialised - Alternative uses - Macro Drivers

4 The Do s KNOW YOUR SECTOR This sounds obvious but getting a firm understanding of what drives the sector, particularly the supply and demand dynamics, is critical Knowledge of the wider picture is essential. The politics, the viability, the place within the wider economy further demonstrated in slide 6 UNDERSTAND THE OPERATION & MANAGEMENT The better your understanding of how an asset is run and managed on a day-today basis, the more easily you can monitor and control costs outsource this! The operation needs to be professional and transparent. The operation and management are often handled by one party make sure there is full visibility CAPITAL ALLOWANCES These reduce annual tax liabilities. Developers usually hold assets on their balance sheets as Trading Stock. This means they cannot claim Capital Allowances. As a specialised area, this is best outsourced to a professional building consultancy who submit the claim. Cash savings can improve returns significantly. PLAN YOUR EXIT STRATEGY Think of alternative uses and what can be done with the real estate at the end of the hold period how valuable is the land, what is the VP value Due to the need for scale in alternatives, there is greater liquidity at the larger end of the deal spectrum, so for smaller assets do not assume a quick sale

5 The Don ts DON T TRY TO DO IT ALL ON YOUR OWN The opportunity cost of trying to bring down expenses and control the operation more tightly is far too high and the undertaking is too risky and time-consuming Economies of scale can only be achieved with critical mass (e.g. more than 10,000 beds in student housing). Private investors should not worry about this. DON T BUY ON THE CHEAP 10% yields look good on paper but we all know yields are a reflection of risk so when evaluating an investment consider the pricing very carefully Pricing is based on property fundamentals location, build quality, connectivity so if the fundamentals are sound but the price is below market ask questions! DON T BELIEVE THE HYPE 8% Net Income Guarantee for 5 years this is not what it seems! If you re promised such things you should be suspicious of the deal Fully occupied for the last 10 years is there proof of this? Have you seen historic data or last year s budget? DON T LEND AGAINST WHAT YOU WOULD NOT BUY Banks have targets and managers need to service their clients. But if a valued client is looking to finance an asset in an obscure location highlight the risks When lending against CRE you lend against an income stream. Don t rely on guarantees or top-ups, rely on the asset s performance in the open market

6 Funding & Investment Student Housing Net Initial Yields 2017 YTD Student Housing Investment Volumes Source: Savills Spotlight, UK Student Housing 2017

7 Funding & Investment Student Housing Rental Growth by City Student Housing Rental Growth by Bed Type Source: Knight Frank s Student Property Index

8 Funding & Investment Source: CBRE, The Atlas Summary 2017 Source: Cushman Wakefield, RCA: Deals over US$10mn

9 Recent Transactions 1. This month, Investec Structured Property Finance has provided a 23.6m funding line to Curlew Student Trust for the development of a 454-bed Grade-A scheme in Bournemouth, and an additional 2,000 sq ft retail unit. 2. In June, Uliving financed a new 67.5m student accommodation development for the University of Essex using an index-linked wrapped bond placement, for the creation of 643 new student rooms in Colchester and work is set to complete in September next year. 3. In June, Europa Capital Partners and Generation Estates formed a joint venture called Europa Generation to manage a new UK student accommodation fund. 4. In March, a Unite fund made 34m acquisition in Durham. Unite Students Accommodation Fund acquired a 34m asset under development in Durham with the aim of providing accommodation for 363 students. 5. In March, an ex-blackstone MD built the transatlantic PRS platform Node. New private rented sector (PRS) company Node, was set up by former Blackstone managing director Anil Khera last October, has already amassed a portfolio of assets on both sides of the Atlantic.

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