CM17986 UK Connections matter For professional investors only Paul Myles, Peter Lowe, Jamie Kellett Building a stable income stream from a sustainable housing solution
Investment risks The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Screening out sectors or companies may result in less diversification and hence more volatility in investment values. The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment. 2
Introduction What will we discuss today The UK private rental sector is estimated to be larger than the entire UK commercial property market yet less than 2% is institutionally owned Residential Property provides a low correlation with other property investments and can offer a long dated inflation linked cash flow How BTR brings a social benefit to the community, while allowing investors and the Local Authorities to work in partnership to provide discounted rents to key workers 3
Agenda Building a stable income stream from a sustainable housing solution Why Invest in UK Residential Property? What strategies are available to Institutional Investors? What considerations do you need to take into account before investing? 4
Growth sector The UK private rented sector is estimated to be greater than the entire UK commercial property market yet less than 2% is institutionally owned > Market size in comparison to UK commercial property Value of Investment Stock ( bn) 1200 1000 800 600 400 200 2%* 98% 55% 45% 0 Residential Real Estate Commercial Real Estate *BTR accounts for circa 35-50% of this volume. Non-Institutional Investor Institutional Investor Strengthening sector within the real estate universe 5
Supply shortage Housing completions 1949 2016 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 1949 1951 Source: DCLG Live Table 241. *UK Government Housing White Paper, February 2016. 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 Market failure not delivering homes 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Private Enterprise Housing Associations Local Authorities Annual housing requirement* 6
Changing housing market dynamics Housing is in demand, but the nature of the demand is shifting > Trends in tenure: outside London 50 40 Percentage (%) 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Buying with mortgage Private renters Source: DCLG, Private Landlords Survey 2015-2016. Requirements for housing evolving 7
Rental growth 150 140 130 120 110 100 90 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Retail Office Industrial Residential (IPD) Residential (ONS) CPI (ONS) Source: IPD/MSCI, Office for National Statistics as at 31.12.2016. IPD: Professionally managed stock. ONS: National private rented stock For illustrative purposes only. Historically UK residential has delivered above inflation rental growth 8
Agenda Building a stable income stream from a sustainable housing solution Why Invest in UK Residential Property? What strategies are available to Institutional Investors? What considerations do you need to take into account before investing? 9
Existing products UK PRS fund landscape 1,400m Open/Queues Get Living 1,200m Closed/Joint Venture Moda Living Essential Living 1,000m 800m 600m 400m 200m TM Hearthstone UK Residential Property Fund LaSalle UK Private Rented Sector Fund Invesco UK PRS Fund Places for People L&G BTR Fund M&G UK Residential Fund 0m A selection of current residential build to rent strategies Source: BMO Real Estate Partners, JLL as at 30.09.2018. Notes: Estimated equity deployed/committed. Difficulty for institutional investors to access residential property products 10
The shape of the housing market Families by housing tenure Families that own their own homes 25% 13% 100% 90% 80% 70% 60% 50% 7% 40% 30% 27% 22% 6% Own Outright Own with Mortgage Private Rent Housing Association Rent Council Rent Living with Parents 20% 10% 0% 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 25-34 35-44 45-54 55-64 65+ 2011 2016 Source: The Resolution Foundation as at 30.09.2018. 11
Agenda Building a stable income stream from a sustainable housing solution Why Invest in UK Residential Property? What strategies are available to Institutional Investors? What considerations do you need to take into account before investing? 12
Great, let s build some homes! > But first there are barriers to entry to navigate Appropriate target occupier market Housing market structural imbalance Access to stock Delivery / operational expertise Risk / return profile Scalable deployment approach is key 13
Where to focus a UK housing product On the deepest occupier market Distribution of UK Household income 2017 Number of Households 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - - 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 30,000 33,000 36,000 Income Band ( ) The deepest occupier market who are not being provided for by the current housing market. 39,000 42,000 45,000 48,000 51,000 54,000 57,000 60,000 63,000 66,000 69,000 72,000 75,000 78,000 Source: Office for National Statistics - Household disposable income and inequality in the UK: financial year ending 2017. Notes: UK disposable income defined by the ONS as income + benefits taxes. Why this area? Reduce letting risk higher demand for a lower rent product Improve planning viability of schemes Local authorities want to see this type of housing delivered Improve social impact of product long term secure homes for those that need them 14
Offering affordable private rents What is mass market housing? Rental accommodation that does not over-burden people The market defines being overburdened spending more than 35% of gross income on rent Example occupiers would be: In full / part-time employment Key workers such as NHS staff who can earn between 15k (porter) - 28k (fully qualified nurse) pa On average incomes, in 2017 this was 27.6k pa Source: BMO Real Estate Partners as at 30.09.2018. Grey = discounted market rent. Blue = market rent Expanding occupier base reducing letting risk 15
Incorporating Environmental, Social and Governance For residential property ESG becomes more than just the E and G ESG approach must go beyond traditional environmental concerns Evaluation of social impact to enhance positive outcomes In order to: Support the strategy s investment objectives Protect the income Improve the resilience of schemes ENVIRONMENTAL energy, climate waste SOCIAL Safety, health, socioeconomic GOVERNANCE Diversity, equality, shareholder rights, transparency Underpinning sustainable communities 16
Case Study Example build to rent assets Scheme overview 168 high density units 20 minutes walk from the city centre Adjacent to existing student housing scheme Two major hospitals located within a mile of the scheme employ over 16,000 staff Two of the three universities in Leeds located within a mile (Leeds & Beckett) Only large scale build to rent development to the north of the city centre Key regeneration location for Leeds City Council Legend Scheme Hospital University Source: Home Group, Google Maps as at 39.09.2018. 17
Indicative cashflow for residential build to rent Millions 20 15 10 5 - -5-10 -15-20 -25-30 -35-40 -45-50 Sep 18 Sep 19 Sep 20 Mar-21 2.43% Sep 21 Dec-21 3.52% Sep 22 Sep 23 Sep-24 4.53% Sep 24 Sep-24 6.95% Sep 25 Sep 26 Sep 27 Sep 28 10% 5% 0% -5% -10% -15% -20% -25% Return Capital Cash Inflows (Coupons & Gross Rental Income) Geared Fund CF - IRR: 6.09% Income Return YoY Total Return YoY Source: BMO Real Estate Partners as at 30.04. 2018. Notes: IRR = Internal Rate of Return. YoY = Year on Year. 10-year snapshot delivering a projected IRR of 6.09% 18
BMO Global Asset Managements strategy summary Mass market build to rent offers Provides institutional investors with exposure to mass market and discounted private rents A growth sector with favourable demand supply dynamics Long dated inflation linked cash flows A responsible and sustainable investment solution Alignment of interest between the Local Authority and the Investor Source: UK Government Housing White Paper, February 2016. 19
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