Despite all the Brexit uncertainties, the fundamentals of UK residential remain: plentiful rental demand; favourable demographics; and consumers wanting ‘everything as a service’. Institutional interest in the sector is strong. Last year, we secured a partnership with Harrison Street and NFU Mutual to help fund the 6,500-apartment build-to-rent (BTR) pipeline assembled with Moda Living.
Securing investor interest, however, is only half the battle. Debt finance is also crucial. Our experience with partners such as pbb Deutsche Pfandbriefbank has been fortuitous. Since we agreed our £85m senior debt facility for Angel Gardens (pictured) in Manchester two years ago with pbb, we have gone from receiving two bids to more than 25 per transaction.
Another exceptional partner is LaSalle Investment Management, which has funded Apache across BTR, student and senior living. In 2016, it whole-loaned £76m for our Paul Street student scheme in central London before syndicating £55m of senior debt to Wells Fargo. In Liverpool, LaSalle’s £58.5m senior debt facility is helping Moda create The Lexington, while in Clapham, our Audley joint venture is taking on senior living with a £110m LaSalle facility.
There is now a greater depth and breadth of providers, ranging from high street banks to specialist debt funds, insurers and investment banks (domestic and international). To get deals over the line, specialist banks and debt providers remain the best bet for now while the market is in its early stages.
Major high street banks are restricted and need time to process deals through their investment committees. There is certainly a willingness to be flexible and banks are not to be blamed for their cautious approach. Tighter regulatory controls have combined with the challenges that underwriting an emerging asset class throws up. Specialist lenders will always have more flexibility and smart developers will weigh up the trade-off between cost and speed.
Construction remains one of the biggest single risk factors; high-rise city centre schemes demand a very experienced team. When we topped out Angel Gardens in January, I doffed my hard hat to Moda’s Andrew Parker, Johnny Caddick and Tony Brooks, who led development alongside Caddick Construction, which stepped in following Carillion’s collapse.
We had put a strong contingency plan in place early on, but the outcome would not have been possible without the fantastic support from pbb.
Clearly, with a growing field of providers there is an increasingly complex choice of debt. The simplest way to overcome this is to ensure your debt profiles are wholly aligned, both with your target investment strategy and your capital structure. In an emerging sector, there will be ongoing challenges around construction and lease-up rates. Ensuring you have suitable headroom in your covenants – allowing a sensible stabilisation period – maximises your flexibility and reduces and manages your risk responsibly.
The search for yield means there is room to bring more build-to-core institutional investors into UK multifamily platforms. As UK student accommodation yields fall into line with PRS, most agree the trajectory for BTR pricing will follow. Buoyed by this, US investors see the permanent structural shifts occurring in our housing market and are prepared to extract value. We expect lenders to follow, too.
Despite British politics rolling into a black hole, there is one certainty ahead: that demand for rental housing will continue to grow. Britain’s alternative real estate market will remain robust and as investment snowballs into residential, this could light a fire under banks’ credit committees. I’d rather be negotiating with them than the EU any day of the week.
Richard Jackson is managing director of Apache Capital
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