There is no doubt that market rent is currently newsworthy, offering an attractive alternative to other established pressurised tenures, with mortgages unaffordable or unavailable to first time buyers and affordable housing undersupplied. The huge demand currently experienced in London is further compounded by Students and overseas visitors and businesses and, of course, the Olympics.
The quest, however, is to establish a tenure that transcends short term cycles to create an aspirational housing form in the market and one that generates returns for investors that stand the test of time.
Market rent models can be short term, an economic stop gap to create cashflow in a weak sale market for instance, our interest however is in the financial and qualitative metrics that can be described for a long term patient investor.
Our experience tells us that many of our traditional clients exit projects well before values are optimised.
Yolande Barnes of Savills has also modelled the uplift of values of a basket of schemes [Fairford Leys, Crown Street and Poundbury] in five year periods post completion. Her research demonstrates that, while little meaningful uplift is generated in the first five year period at perhaps 20pts above RPI, by year fifteen the pattern of enhanced values is well established and an impressive 140pts above RPI was measured from a these projects in years fifteen to twenty.
A key further ingredient is the belief that good design adds a value premium a belief is clearly supported with research by Yolande Barnes looking at the same basket of schemes designed on best practice design principles. The research demonstrates a GDV per hectare of between 19% and 35% higher for the selected projects than adjacent standard housing schemes in the same location.
The clear conclusion from both of these lines of study is that only a long term property owner or investor with a retained stake can benefit from this value uplift.
Taking this as the basic premise, the model we are investigating is a blended equity and debt arrangement held over a twenty year term. Equity can be in the form of land creating the tantalising prospect of the Public Sector and Local Authorities participating in housing supply in partnership with the private sector developers and investors, while participating in the yields created. Debt, provided through bank lending against balance sheet or rental income is repaid over the borrowing term through rental income. At 80% of Market rent, schemes would qualify for AHP grant if the provider received a portfolio allocation and avoid section 106 liability.
By modelling this approach with a modest uplift in rental and capital appreciation over the term of borrowing, an example developed in partnership with Pocket demonstrated a yield greater than 8% if the development were to be sold at that point.
By modelling this approach with a modest uplift in rental and capital appreciation over the term of borrowing, an example developed in partnership with Pocket demonstrated a yield greater than 8% if the development were to be sold at that point.
We believe this model could bring together public land, private money and development skills to provide high quality housing in a tenure form that meets the ever increasing demand for homes in London.