David Allen, Director of Holt Commercial, was asked to contribute this article to the Cambridge University Land Society Magazine 2018.
After 40 years of commercial activity in Birmingham, my main focus has switched to the alternative sectors of out of town drive thru investments but especially PRS funding.
I am fortunate enough to be acting on three current PRS funding opportunities in Birmingham comprising 157 units, 152 units and nearly 400 units.
As a result of seeking institutional finance, I am now aware as to the reality behind the news headlines.
To my knowledge in Birmingham there have been no actual transactions on built and let stock and all have been funding transactions. The drivers for this are, besides the SDLT benefits as land is a low percentage of the GDV, the institutions do get what they require. These are the correct sized rooms, the correct letting mix and amenity areas such as gyms, interaction space, community events etc. not normally provided in build for sale. Modus are also looking at substantial roof top development on their scheme in Broad Street In fact this is being replicated in new office developments.
Whilst there have been a lot of hyped deals that have been relatively few actual institutional funding. So far Rockspring (now Patrizia also acting as a developer ), Long Harbour, LaSalle, Legal & General, Grainger and one or two overseas funds have been purchasers plus another one or two which will be announced before this article is published. This does total in excess of 1,200 units with a significant number to follow in the pipeline.
I have recently been marketing a circa 400 unit scheme where the overall development value is circa £100m and whilst there is much reported activity by institutions in moving out of London to seek better value, it is a much more limited market for values in excess of £50m.
The “sweet spot” is certainly between 150–200 units. The majority of this demand is from UK based funds but with an increasing international influence with money from Canada and USA as well as Netherlands and Germany where there are mature and sophisticated multi- family housing investment markets.
Capitalised rental values remembering that these are after deductions of 25% or more from the gross income are still are below vacant possession values. In Birmingham, this probably equates to vacant possession values of in excess of £350 per sq ft whilst PRS values have been nearer £300 per sq ft. Both these figures have moved up possibly by £50 per sq ft. This is relevant as the RICS guidance note on PRS valuation suggest using vacant possession value as a checker.
The significant aspect that I have learnt is that design is crucial and it is an evolving market.
As mentioned before valuation is the capitalisation of net income so design and management are crucial in driving the gross income in terms of letting mix, reducing turnover and reducing costs for example efficient cores, security specification of finishes. It is the landlord who pays for this. Perhaps the nearest equivalent sector would be to student purpose built accommodation of over five years ago. Generally, funds prefer new build as permitted development rights product is difficult as units are quite often compromised. It pains me to say as a Birmingham surveyor that Manchester is probably ahead but that our time will now come as Manchester has a significant pipeline to accommodate.
Outside of Birmingham within the general Midlands area, there has been a purchase of an existing scheme in Leicester by Aberdeen Standard and a funding by Cording in Nottingham, otherwise not much of note.
In analysing these transactions, the inevitable problem is in comparing apples with apples. Very often the level of coupon varies, what is actually being provided in terms of specification are greatly different. Equally, the tenure on schemes and the actual deduction made from rental values will vary significantly as well. Within a funding transaction equally who’s costs are paid for out of which pot will vary the purchasers actual end yield. All very obvious but makes it difficult to obtain the detail to analyse deals.
It is accepted that yields have hardened down to the low 4% levels and there is still significant interest with a number of institutions having failed to secure their first purchase which should keep yields at these levels.
At the moment there seems to be no prospect of over supply but then the property market does have a habit of building in cycles.